What are the 3 Parts of an Income Statement?

A profit and loss or an income statement assist business owners in determining whether they can yield a profit through rising revenues, reducing costs, or both. It also demonstrates the success of the tactics established by the company at the start of a fiscal period. Business owners can use this document to determine whether their strategies were successful. Based on their evaluation, they can devise the most profitable solutions. Thus it is crucial to know the Parts of an Income Statement.

What is an Income Statement?

An income statement also called a profit or loss statement, is among the three key financial statements that a company uses to report its financial achievements during a particular accounting period. It constitutes a company’s fundamental financial statements which show its profit and loss over time. The following are the 3 important Income Statement Parts.

1. Revenue

Revenue refers to the income generated by a company from the sale of products and services to its customers. This includes the majority of the company’s operations. In general, revenue is devoid of any special tax benefits, tax credits, or depreciation. It is one of the most important Parts of an Income Statement, as its value affects the gross profit as well as net earnings. Revenue is divided into two categories: operating and non-operating. The revenue earned by a company from primary activities such as manufacturing goods or offering a service is referred to as operating revenue. Non-operating revenue is generated by non-core business activities such as system installation, operation, or maintenance.

2. Expenses 

Expenses are also known as the costs associated with running a company. It includes everything that costs the company money in order to generate revenue. In a company’s income statement, expenses come after revenue. It is reasonable to assume that the higher the revenue and the lower the cost, the greater the profits and the stronger the business. The income statement divides expenses further into two categories: cost of goods sold & operating expenses.

• Price of Goods Sold:

It is also referred to as direct cost since it’s involved directly with the cost of commodities or services sold by a company.

• Expenses for Operations:

These include all costs associated with a company’s operations like  Employee salaries, capital depreciation, utilities and rent costs, advertising costs, and so on.

3. Net income

The third of the Income Statement Parts is Net income, which is often referred to as net profits. The worth of the first two aspects, liabilities, and equity, is subtracted from the value of assets to calculate net income. The calculation is performed by removing revenue from cost, which includes capital depreciation, amortization, interest, & tax payment. Net income indicates whether or not a company is profitable. If the company’s revenues exceed its expenses, it is profitable or has a positive net income. However, if the company’s revenues fall below its expenses, it will incur a loss.

An income statement serves as an extremely useful tool for evaluating a company’s performance. It contains all of the important metrics, which aid the investor in developing performance standards for the company.

Want to know more about Income Statement Parts? Meru Accounting has got expert team to help you out.