Income Statement Accounting

Everyone says financial reports are important for your business.

But, WHY are they important?

In this series, I’ll help you understand the four reports to review in your business:

  • the balance sheet 
  • the income statement (this post)
  • the cash flow statement
  • the chart of accounts

But most important, I’ll help you understand why. Let’s get to it!

Money, That’s What I Want

If you’re in a for-profit business, then guess what? You want to earn money.

If you’re in a not-for-profit business, then guess what? Yep. You still need to earn money.

When you’re busy raising money, whether from customers or donors, you are hyper-focused on bringing in as much money as you can.

But, where is your money coming from?

From your customers?

Great! What are they buying?

From your donors & some grants?

How do you know?

Debits & Credits

If you’re in business, you’ve heard of debits & credits.

In accounting, to keep things balanced, debits = credits.

Debits are any amounts on the left side. Credits are any amounts on the right side.

They can be any accounts or categories, but to balance, you need the left side amounts to equal the right side amounts.

When you look at your balance sheet, you’ll see what’s called the accounting equation:

Assets = Liabilities + Equity

When you look at your income statement, you’ll see another accounting equation:

Income = Revenue – Expenses

Your income statement can also be called your profit & loss statement, because if

Revenue > Expenses

Then your business will see a profit, the ideal business situation.

But, if

Expenses > Revenue

Then your business will see a loss, which is not ideal.

An income statement or profit & loss statement is a report of all your business-related revenue & expenses (as well as costs of goods or services), for a period of time.

The period of time could be a day, a week, a month, a quarter or a year. Any period, really.

If you look at an income statement on Monday, you will see Monday’s revenue and expenses.

If you look at an income statement next Monday, the report will only show next Monday’s revenue and expenses.

When you gather all of the transactions for your business & put them into this report, you’ll be able to see whether your business made a profit or suffered a loss.

For example, let’s say you’re a coach who also has books for sale & this is your income statement as of last week:

Your Business

Income Statement

LastWeek, 2018

Revenue

Workshop Fees $2000

Conference Book Sales $500

Total Revenue $2500

Expenses

Wages $600

Payroll Expenses $50

Advertising & Marketing $150

Office Supplies $100

Travel – Airfare $250

Travel – Hotel $350

Total Expenses $1500

Net Income* $1000

Income = Revenue – Expenses

$1000 = $2500 – $1500

Because Revenue > Expenses, your business is looking at a profit.

Let’s have a look at what all these terms mean, so your income statement has more meaning.

Income Statement Revenue

Revenue (How Much Did Your Business Earn)?

On your sample income statement, there are two revenue types listed: fees and book sales.

Revenue is all the ways your business earns or brings in money (before expenses or costs).

You sell a book at a conference, you receive money for it. Your business earned it.

You have people pay you to attend your workshop, you receive money for it. Your business earned it.

When your customers pay you, you receive money from them. You’ll deposit that money in your checking account.

In this example, let’s say you earn $300 in book sales.

You would receive money of $300 (for this example, let’s say your customers pay in cash).

You’ll deposit the money received in the checking account, so your checking account will increase by $300. You should see $300 more in your checking account.

In accounting, everything needs to balance.

In our example of the customers’ payments, this is how we get balance:

Checking Account (asset) $300 Conference Book Sales (revenue) $300

There is a debit to checking account of $300, but to keep balance we need a credit of $300.

We credit the revenue account, because it’s the other side of this example.

Remember, debits are any amounts on the left side and credits are any amounts on the right side.

Debits = Credits

$300 = $300

Balance.

Expenses (How Much Did Your Business Spend)?

On your sample income statement, there are four expense types listed: payroll-related, advertising, office supplies and travel-related.

Expenses are how your business spends money to keep the business going and growing.

Typically the things you buy (on a somewhat regular basis) for your business fall into this category.

The examples listed on the sample income statement are just that. Examples. Your business may have some, none or all of these.

Payroll-related expenses may include wages, salaries, payroll processing fees and payroll taxes.

Advertising expenses may include social media marketing (e.g. Facebook ads, Google ads).

Office supplies may include items used frequently by your business (e.g. paper clips, pens, Post-it notes).

Travel-related expenses may include hotel rates, hotel parking fees and airfare.

When you buy things or spend money on expenses, you’ll pay that money from your checking account.

Let’s say this week, you spend $250 on airfare (under Travel).

You would pay money of $250 (for this example, let’s say you pay with a debit card).

Your travel-airfare expenses will be $250.

You’ll withdraw the money from the checking account when you use your debit card. Your checking account will now have $250 less than it did before you spent money on airfare.

In accounting, everything needs to balance.

In our example of the airfare purchase, this is how we get balance:

Travel – Airfare (expense) $250 Checking Account (asset) $250

There is a debit to the travel-airfare account of $250, but to keep balance we need a credit of $250.

We credit the checking account, because it’s the other side of this example.

Remember, debits are any amounts on the left side and credits are any amounts on the right side.

Debits = Credits

$250 = $250

Balance.

Income Statement

Income (What Is the Value of Your Business)?

Earlier, we discussed the income statement and the accounting equation:

Income = Revenue – Expenses

Income is the total profits (or losses) of your business after expenses.

Ok, not entirely. There are other things to consider like taxes, but, it is a good estimate of the profits from your business.

Remember, an income statement or profit & loss statement shows all your business-related revenue & expenses, for a period of time.

In the sample income statement, we see Revenue > Expenses.

But, what happens when Expenses > Revenue?

Let’s make some changes and suppose this is your income statement as of last week:

Your Business

Income Statement

LastWeek, 2018

Revenue

Workshop Fees $2000

Conference Book Sales $500

Total Revenue $2500

Expenses

Wages $650

Payroll Expenses $100

Advertising & Marketing $250

Office Supplies $150

Travel – Airfare $550

Travel – Hotel $900

Total Expenses $2600

Net Loss* -$100

Income = Revenue – Expenses

-$100 = $2500 – $2600

Because Expenses > Revenue, your business is looking at a loss.

As a reminder:

Revenue > Expenses

Then your business will see a profit, the ideal business situation.

Expenses > Revenue

Then your business will see a loss, which is not ideal.

Income Statement Money

Got Money?

Now that we understand so much more about the parts of the income statement, let’s take a look at this week’s income statement.

For this example, we’ll assume the only changes this week were the ones we created in the previous revenue and expenses sections.

Remember, when you look at your income statement, you’ll see

Income = Revenue – Expenses

In an ideal business, you’ll have more assets than liabilities.

After our transactions from the previous sections, this is your income statement as of this week:

Your Business

Income Statement

ThisWeek, 2018

Revenue

Workshop Fees $0

Conference Book Sales $300

Total Revenue $300

Expenses

Wages $0

Payroll Expenses $0

Advertising & Marketing $0

Office Supplies $0

Travel – Airfare $250

Travel – Hotel $0

Total Expenses $250

Net Income* $50

What differences do you see? What stayed the same? Why?

The conference books sales amount under revenue and the travel-airfare amount under expenses are different this week than last week. So are all the other revenue and expense items.

Remember why?

That’s right.

An income statement or profit & loss statement is a report of all your business-related revenue & expenses for a period of time.

We received (earned) $300 from a customer and spent (paid) $250 for airfare.

$300 earned and $250 spent.

Income = Revenue – Expenses

$50 = $300 – $250

Balance.

All other accounts or categories (e.g. workshop fees, wages) showed zero. Why? Because we didn’t have any transactions that used those accounts this week.

The income statement will only show transactions for a period of time.

It’s important for you to know which amounts change, if any, and why. As you can see from the example, your business earned (revenue) more than it spent (expenses).

Revenue > Expenses.

It’s in an ideal business situation.

Making Money Moves

Now that you know what the income statement is and WHY it’s important to your business and to you as business owner, it’s time for YOU to look at your numbers.

Open your accounting software or spreadsheet and review your income statement.

Does your Income = RevenueExpenses?

Look at the balances in each account or category from last week. Look at those same accounts or categories this week.

What differences do you see? What stayed the same? Why?

If you have any questions about any of this, drop me a line and ask. I’d be glad to help!

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Hiya! I’m Paula, sometimes called the “Numbers Counselor”. Here at Small Stepping Stones, I use bookkeeping workflows & trainings to help small business owners and small non-profits (like YOU), one step at a time.