Business is all about profit and loss. The sole aim of establishing a business is to make profit. When a profit is not made, the business can be said to be retrogressing rather than progressing. Proper accounting helps a business to track its processes and know when it is progressing or going down the drain. This is why profit and loss account also known as income statement is highly important in a business. Income statement goes by several other names such as revenue statement, statement of financial performance, operating statement, statement of operations, earning statement and so forth.
It is one of the important tools of business uses in measuring its overall business progress. It shows the revenue and expenditures of a company at a particular period of time. The income statement shows the revenue as well as the net income. Revenues are money received from the transaction of goods and services before expenditures are removed. The net incomes or net profits are taken into account in the income statement. The cost charged against the revenues as well as the depreciation, amortization of the assets and so forth and many other write-offs and taxes are accounted for in the income statement.
Why income statement?
It is really important to know the purpose of an income statement. Understanding the reason why an income statement is created will help you to make the most of it. The income statement helps in showing the investors as well as the managers the progression or retrogression of the business. From the income statement it will be easy to ascertain the direction the business is moving and to track loss and profit over a given time duration.
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Processes of creating an income statement
Income statement can be prepared through two major processes and these include the single step process and the multi-step process.
Income statement prepared with the single step process is known as single step income statement. As the name of this income statement implies, it is easy to prepare. The preparation of this income statement simply involves calculating the total of the revenues and then subtracting the expenses made from the result obtained. The result obtained is the net income and gives a clear picture of the direction the company is going, whether it is progressing or retrogressing.
Multi-step income statement is prepared with the multi-step process. As the name implies, this simply involves several steps to arrive at the net profit. This income statement starts with the gross profit. The operating expenses are then calculated and the result is the income obtained from the operations. You need to add the difference of other expenses and revenues to income from operations and the result will give the income before taxes. The net profit is obtained by deducting taxes from the income before taxes. This is the net profit or net income for the specific period of time.
Limitations of income statement
An income statement does not account for immeasurable items such as loyalty and so forth.
The accuracy of the process is dependent on the method used.
The bottom line is that income statement help in giving a clear picture of your business and can help to easily access your business and make necessary amendments to drive it in the positive direction.