An income statement is a report that shows a list of a business’s revenue and expense items.
From analyzing this report, a reader can gauge if a business made a profit or a loss. It is a useful tool that shows how a business performed during a financial period.
Once your trial balance is properly balanced, you will copy the appropriate income or expense number from the trial balance and paste it into the income statement.
[Click Here to refer to the Trial Balance article for the numbers]
As you can see, when preparing the income statement, we start off by listing our direct income and direct costs at the top. We calculate the Gross Profit which is simply your direct income minus your direct costs.
Thereafter, you will list all your indirect costs below the gross profit line.
A direct cost in simple terms refers to the costs that can be directly attributed to earning that business income. For example, if you are a manufacturer, your raw materials, labour and utility costs to use a machine to create your product will be considered to be direct costs because they are easily identified as necessary to creating the actual product itself.
The indirect costs are all the supporting costs that are incurred to keep your business functioning and operating smoothly. While these costs do not have a direct impact on the cost of your product itself, without these indirect costs, your business will collapse. Common examples of indirect costs include advertising, I.T. costs, accounting, administration, printing paper for the office and so on.
Net profit is the money that is left over from a business's operations after all expenses have been paid and accounted for. As a business owner, you always want to have a positive number as your net profit. This means that you have spent less money than you have earned. If your net profit is a negative number, we call that a "net loss". This is not a good thing because that means that you have spent more money than you have earned in your business.
From the above income statement of Tom Inc. we can say that after the first month, the company has done well to make a profit of $13 700. The business has done a great job with keeping its expenses low and has saved some money to reinvest into the corporation.
