Understanding The Basics Of the Income Statement

Understanding The Basics Of the Income Statement

The profit and loss statement is also called the income statement. It shows you the profitability of the business for a specific period.  Usually, it is produced annually, quarterly and monthly.  It is the best tool for businessmen to monitor their business activity. It shows the business owners where its business is struggling and where it’s succeeding. The investors would use the income statements to analyze the financial health and then take their decision on potential investment. They could easily identify what type of return they would be getting for their investment.

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Profit and loss statement/ Income statement

This statement is generally split into two sections:

Revenue- This will include all the details of your income from the primary business activities like sales of services or products, any revenue generated from the secondary activities like bank interest and other financial gains it receives.

Expenses- It includes all the details of the expenditure incurred on the primary activities like labor costs, materials purchased. etc), secondary expenditure and other losses incurred during that period.

Revenue

Total sales are one of the important sections in the revenue part. Other income and secondary revenue are always unpredictable, hence in order to grow the business one should focus mainly on the sales revenue.

You need to check out how much sales had fallen or risen since your last profit and loss statement. You need to find ways to increase the revenue between each income statement. If there is a pattern of revenue falling from the previous statement then it denotes that your business is in trouble.

Expenses

The important figures in this section are:

Cost of the good sold- It is the cost of raw materials used and direct labor costs.

Operating expenses- It is the cost of the indirect labor and all other costs which does not have a direct link to producing the goods or services.

You always need to find ways to lower the costs whenever possible. For instance, if the material costs are rising then you should find a different supplier. However, inflation does cause the increase in price, hence some of the increase in cost is inevitable.