The income statement is one of three financial statements that are used to report a company’s finances for a certain period. Can be weekly, monthly, quarterly, half yearly or even a year. In the income statement usually contains and summarizes all costs, both incurred or obtained by the company while doing business. Together with the balance sheet and cash flow statement, the income statement becomes an important component in a company’s financial reporting. Any company that cares about financial health will certainly understand and make financial reports, especially income statements. This report is the simplest initial report because it requires less data from the balance sheet and cash flow statement.
In the title section usually contains the name of the company, the report title and reporting period. The income statement can also be large or small, depending on the complexity of the company. In addition, the format used by most companies is the same. However, there are several items that can differ depending on the industry. Most important this report has three aspects namely revenue, expenses and net income.
Function of Income Statement
An income statement is made to see whether the company that is running makes a profit or not. In it will summarize all company income and subtract it with expenses, so that what remains is profit or loss from the company. With this detailed record, the company will be able to know the performance of the business being carried out . And if there is a mismatch, the company can make decisions that can develop the company. Based on this report also, management can make decisions such as adding branches, driving sales, increasing production capacity, increasing the utilization or direct sale of assets,and efficiency of a sector or product. Although the main function of making an income statement is to display the details of profitability and business activities of the company to the management element, but this report is also used to provide details to various sectors in the company to add insight in advancing the company.
Purpose of Income Statement
The preparation of the income statement has a purpose. What are there?
- Provides information about the condition of a company, whether gaining profits or losses in each accounting period.
- Provides information about the total amount of tax that must be paid.
- Help the business analysis process that will measure the development of a business.
- As a reference material for the evaluation of the company’s management to determine the steps that must be taken in the next period.
- As a company reference in an effort to develop a business if you want to increase profitability.
- Helping the process of analyzing the company’s strategy to find out the success of business strategies that are carried out to achieve company goals.
Also read: Knowing Company Performance with Income Statement
Components of Income Statement
As explained earlier, the information provided by the income statement is simpler than the balance sheet and cash flow statement. This report does not cover receipts (money received by businesses) or cash / disbursement payments (money paid by businesses). Matters covered are details of expenses and sales which are then passed on to net income. These components include:
1. Revenue
The income recorded is operating income and non-operating income. Operating income is revenue that is realized through the main activities of a company. The results of activities such as producing products, selling products and marketing products to distributors or retailers are included in operating income. Meanwhile, non-operational income is obtained by running secondary and non-main business. This income comes from outside sales and purchases. For example, only the interest earned from existing business capital in banks, rental business property, strategic partnerships and so forth.
2. Advantages
Profits are also called other income. This is a net result obtained from non-business activities or other activities of the company such as the sale of old assets, sales of subsidiaries and so forth.
3. Profit Before Tax
Income before tax is the total income that has not been deducted by tax. So, to calculate this pre-tax profit, you must reduce operating profit by interest expense.
4. Profit Before Interest and Taxes
This shows how much profit the company makes from its operational activities without including the element of interest costs or taxes.
5. Load
All costs that are used to operate and generate profits are also called expenses. Similar to income, expenses are also divided into two categories, namely main activity expenses and secondary activity expenses. The main activity expenses are costs incurred to run the main business in a company. This includes cost of goods sold, administration and general expenses, development costs and depreciation costs of assets. While the costs of secondary activities are related to non-main business activities such as interest on loans and so on.
6. Losses
Losses are costs incurred for other activities outside the main business. This can include costs used to sell decreased and loss assets, legal costs and other unusual costs.
7. Cost of Goods Sold
COGS is the total expenditure and expense that is charged directly or indirectly to produce goods and services in the conditions and places where the goods can be sold or used.
8. Operating Costs
Operating costs include all costs associated with running your business that are not included in COGS. For example: payroll, travel, training, building rent, utilities, equipment purchases, hardware and software, advertising, cell phones, and internet services.
In the income statement, revenues and expenses of the main business will provide knowledge about how well the business is run by the company. Meanwhile, secondary income and expenses will show the involvement and expertise of the company in obtaining other additional benefits
