[[File:Sankey Diagram - Income Statement.jpg|alt=Sankey Diagram - Income Statement (by Adrián Chiogna)|thumb|

Sankey diagram - income statement (by Adrián Chiogna)]]An income statement or profit and loss (P&L) account is one of the financial statements of a company and shows the company's revenues and expenses during a particular period. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended.

The income statement can be prepared in one of two methods. The single step income statement totals revenues and subtracts expenses to find the bottom line. The multi-step income statement takes several steps to find the bottom line: starting with the gross profit, then calculating operating expenses. Then when deducted from the gross profit, yields income from operations.

Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.

Usefulness and limitations of income statement

Income statements may help investors and creditors determine the past financial performance of the enterprise, predict the future performance, and assess the capability of generating future cash flows using the report of income and expenses. It is very important for the business.

However, information of an income statement has several limitations:

  • Items that might be relevant but cannot be reliably measured are not reported (e.g., brand recognition and loyalty).
  • Some numbers depend on accounting methods used (e.g., using FIFO or LIFO accounting to measure inventory level).
  • Some numbers depend on judgments and estimates (e.g., depreciation expense depends on estimated useful life and salvage value).

- INCOME STATEMENT GREENHARBOR LLC -

For the year ended DECEMBER 31 2010

€ €

Debit Credit

Revenues

GROSS REVENUES (including INTEREST income) 296,397

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Expenses:

ADVERTISING 6,300

BANK & CREDIT CARD FEES 144

BOOKKEEPING 2,350

SUBCONTRACTORS 88,000

ENTERTAINMENT 5,550

INSURANCE 750

LEGAL & PROFESSIONAL SERVICES 1,575

LICENSES 632

PRINTING, POSTAGE & STATIONERY 320

RENT 13,000

MATERIALS 74,400

TELEPHONE 1,000

UTILITIES 1,494

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TOTAL EXPENSES (195,515)

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NET INCOME 100,882

Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board and numerous country-specific organizations, for example the FASB in the U.S..

Names and usage of different accounts in the income statement depend on the type of organization, industry practices and the requirements of different jurisdictions.

If applicable to the business, summary values for the following items should be included in the income statement:

Operating section

  • Revenue - Cash inflows or other enhancements of assets (including accounts receivable) of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances. Every time a business sells a product or performs a service, it obtains revenue. This often is referred to as gross revenue or sales revenue.
  • Expenses - Cash outflows or other using-up of assets or incurrence of liabilities (including accounts payable) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.
  • Cost of goods sold (COGS) / cost of sales - represents the direct costs attributable to goods produced and sold by a business (manufacturing or merchandizing). It includes material costs, direct labour, and overhead costs (as in absorption costing), and excludes operating costs (period costs) such as selling, administrative, advertising or R&D, etc.
  • Selling, general and administrative expenses (SG&A or SGA) - consist of the combined payroll costs. SGA is usually understood as a major portion of non-production related costs, in contrast to production costs such as direct labour.
  • Selling expenses - represent expenses needed to sell products (e.g., salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment, etc.).
  • General and administrative (G&A) expenses - represent expenses to manage the business (salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies, etc.).
  • Depreciation / amortisation - the charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet for a specific (accounting) period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement.
  • Research & development (R&D) expenses - represent expenses included in research and development.

Expenses recognised in the income statement should be analysed either by nature (raw materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function (cost of sales, selling, administrative, etc.). (IAS 1.99) If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1.104)

The major exclusive of costs of goods sold, are classified as operating expenses. These represent the resources expended, except for inventory purchases, in generating the revenue for the period. Expenses often are divided into two broad sub classifications selling expenses and administrative expenses.) under US GAAP. Extraordinary items are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations. [Note: natural disaster might not qualify depending on location (e.g., frost damage would not qualify in Canada but would in the tropics).]

Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)

Disclosures

Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material, including: