Notes

Learn about what goes on an income statement and its format, including how to prepare, what is shown, and examples. Discover the importance of income statements.
Introducing the Income Statement
The Financial Statements are the most popular band in all of accounting. Of the four members that make up the band, the income statement, known as Issy, is the very first one. Income statement is the member of The Financial Statements that tells fans whether or not a company made a profit or incurred a loss in an accounting period. In everyday terms, the income statement tells whether a company made money or lost money in a certain amount of time.

Income Statement Components
Issy is quite an interesting character and pretty easy to figure out. All you have to know are two simple things: revenue and expenses. If you know those two things, you can totally figure him out. All you have to do is use this simple formula: Revenue - Expenses = Net Income.

Revenue is the money that a company takes in. Expenses are the money that a company pays out. Net income is the amount of money that is left after a company subtracts their expenses from their revenue.

Everybody loves to see Issy when he shows that a company had a net income, but what happens if it doesn't? If expenses are more than the revenue brought in, then the company had a net loss. Fans aren't that fond of a net loss, because it means that the company didn't make any money!

Purpose of Income Statements
Now that you know what it is that makes Issy who he is, let's take a look at what role he plays in The Financial Statements. The main thing that fans want to know from Issy is the bottom-line profit or loss that a business had in a certain time period. The numbers used to calculate that bottom-line figure are cumulative, meaning that they are a total of all activities from the beginning of the chosen time period until the end of the chosen time period. Most income statements are generated on a quarterly or annual basis.

Fans want Issy to tell them whether a business is operating profitably and would be a good credit or investment partner or if it's not. Business owners depend on Issy to tell them if the business is running profitably or if there are areas that need improvement. Regardless of why fans are interested in Issy, it is obvious that he carries a lot of weight as a member of The Financial Statements!

Lesson Summary
Let's review what we've learned about Issy. We learned that Issy is the first member of The Financial Statements. The simplest way to figure him out is to use the formula Revenue - Expenses = Net Income.

Revenue is the amount of money that a company brings in. Expenses are the amount of money that a company pays out. Net income occurs if the amount of revenue that came in was more than the amount of expenses that went out. Net loss occurs if the amount of expenses that were paid were more than the amount of revenue that came in.

Potential creditors and investors depend on the income statement to tell them whether or not a business is a good financial partner. Business owners depend on the income statement to tell them how well the business is operating and whether or not there are areas that need to be reviewed.

With all the responsibility that is placed on the income statement, Issy has a very important role in The Financial Statements!