An income statement shows whether a business made money over a period. Business owners who read theirs monthly catch problems early. Here is how to build and interpret one for your company.
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The Structure
Start with revenue, subtract the cost of goods sold (COGS) to get gross profit, subtract operating expenses to get operating profit, then account for interest/tax to get net income.
Key Line Items
- Revenue: total sales.
- COGS: direct cost of what you sold.
- Gross profit: revenue − COGS.
- Operating expenses: rent, salaries, marketing, admin.
- Net income: the bottom line.
Margins to Watch
- Gross margin: pricing and production efficiency.
- Operating margin: overhead control.
- Net margin: overall profitability.
FAQ
How often should I prepare it?
Monthly for most businesses; at least quarterly.
Is profit the same as cash?
No — cash flow differs; the income statement shows profitability, not cash.
Related: P&L Basics and Financial Statements.