Financial statements: The income statement

The income statement is know by a couple of other names. The "Profit and Loss Statement", the P&L (from the previous name), or the "Operating Statement". This statement has two primary sections. First is the income section; second is the expenses. Let's take a look at each one. Then we'll hit one more - "Other Income & Expenses".

Income - also known as Sales or Revenue - consists of your earnings from your day-to-day activities. Depending on the kind of business you're running, you may several sources of income. A mechanical contractor's primary income may come from construction contracts. Additional sources may be equipment or parts sales, repair to people's equipment, system maintenance contracts. Each will be evaluated for its profitability as part of the business when the P&L is reviewed.

Expenses are the costs you incur as you buy things to run your business. Your operating expenses are the field labor, materials you buy to put into your products or projects, items you buy for resale, supplies you need to display what you're selling, etc. Overhead or administrative expenses are the costs of paper supplies, legal & accounting fees, phone service, depreciation, etc.

Once the income is totalled and the expenses are totalled, expenses are then subtracted from the income, with the answer being your profit or loss. This is called your "Net Operating Income".

As your business grows and changes, you'll analyze your expenses to determine if you're spending too much in one area or another. These managerial decisions to make changes will help you make more profit which can be used to build the business by making improvements or buying additional equipment or be taken home for a nicer vacation for the family. You'll likely develop departments to break the business down into more manageable pieces so you can see more easily where your money is going.

After your profit is figured, you may have income or expenses that aren't part of your regular business. An example of "Other Income" would be interest income or proceeds from an insurance settlement. "Other Expenses" might be income earned from crafts placed on consignment in your showroom.

These activities are handled the same way as your regular income and expenses, with the calculation of "Net Other Income (or loss)". "Other income or loss" is added to, or subtracted from, your regular income for a Net Income. This figure is what is used to calculate your income tax. The amount you take home is not a business expense, so it is part of the profit of your business. As a result, it is still taxed.

The thing about profit is that you juggle how much you are willing to have so you can balance how much tax you'll pay vs. how much you'll take home to live and how much you'll leave in the business to you can add value to the business and/or promote it to generate more revenue.

That's enough for tonight. Write back with questions or comments.

Gary