There's no question that keeping your online business healthy is essential for its success. But which report can help you know if your business is doing okay?
An income statement example can give you a detailed overview of your company's financial health and help you identify areas that need improvement. How can you prepare a comprehensive income statement for your business?
In this blog, we'll discuss the parts of this crucial financial statement. We will also give examples of income statements that are helpful for your online business. Let's dive right in!
Income Plus Expense Is the Income Statement
One of the essential financial statements for any business, including online businesses, is an income statement. It shows your revenue, expenses, and net income for a month, three months, and so on. You can use the income statement to assess your small business’s health and make forecasts about its performance.
Perhaps, you're confused by the following names. You shouldn't be, as these statements are all income statements.
- Profit and loss
- Operations statement
- Statement of earnings
- Consolidated statement of income
By comparing cash flow period after period, you can get a good sense of how your business is performing. For example, if you see that your revenue is increasing, but your expenses are also rising, you'll know it's time to make some changes to your budget.
Income statements can also help you measure your strength in sales, see how much leftover money you have, and determine what expenses to cut back on. You can use this document to secure investments or loans. So, if you're not regularly making income statements, now is the perfect time to start.
How to Prepare This Financial Statement
Now that you understand the importance of having this statement as one of your financial reports, it's time to learn how to make one for your online business.
As an ecommerce business owner, you might have already invested in accounting software with templates for these financial statements. But here's what you should remember for the income statement format: headings.
The headings typically include:
- The business name
- The period the statement covers
- The currency in which the financial results are reported
For instance, your business might report its income statement for the fiscal year ended December 31, 2022 in US dollars. Plus, the heading may also include other disclosures, such as whether the statement is prepared on a GAAP or non-GAAP basis.
Types of Income Statements
After compiling all of your transactions into their correct charts of accounts, you can choose whether to prepare an income statement using a single-step or a multi-step income statement.
Single-Step
So, what is an example of an income statement using the first approach? The single-step income statement computes all your revenue and expenses in a single calculation of net income. Thus, it reports revenues and expenses that are easy to understand.
Net Income = (Revenue + Gains) – (Expenses + Losses)
Below is an example of an income statement with this approach.
MPOM Pet Supplies
Income Statement
For Month Ended June 30, 2021
(in US dollars)
| Category | Amount |
| Revenues + Gain | |
| Sales | $57,000 |
| Capital gains | $4,400 |
| Total revenues and gains | $61,400 |
| Expenses + Losses | |
| Cost of goods sold | $22,200 |
| Rent | $8,200 |
| Bank & ATM fees | $22 |
| Equipment expenses | $900 |
| Marketing and advertising expenses | $1,100 |
| Interest expense | $4,000 |
| Income tax expense | $14,500 |
| Minus: Total expenses and losses | $50922 |
| Net income | $10,478 |
Multi-Step
While a multi-step income statement subtracts operating expenses from gross profit to net income. Non-operating accounts, such as interest expense or gains on the sale of investments, are then subtracted or added to arrive at the final figure for net income. Thus, a multi-step income statement provides a more detailed picture of a company's profitability.
Gross Profit = Net Sales - Cost of Good Sold > Operating Income = Gross Profit - Operating Expense > Net Income = Operating Income + Non-Operating Items
Below is an example of an income statement using the multi-step approach.
MPOM Pet Supplies
Income Statement
For Month Ended June 30, 2021
(in US dollars)
| Category | Amount |
| Sales | $57,000 |
| Cost of Goods Sold (COGS) | $22,200 |
| Gross Profit | $34,800 |
| Rent | $8,200 |
| Bank & ATM fee | $22 |
| Equipment expense | $900 |
| Marketing and advertising expense | $1,100 |
| Minus: Operating Expenses | $10,222 |
| Operating Earnings | $24,578 |
| Add: Capital gains | $4,400 |
| Minus: Interest expense | $4,000 |
| Earnings Before Income Tax | $20,578 |
| Minus: Income Tax Expense | $14,500 |
| Net Profit | $10,478 |
Comparative Income Statement
Do you want to evaluate your profits over several periods? Then, a comparative income statement will give you a larger view of your business's finances.
It combines information from several income statements into a single statement. This makes it easy to compare your business's performance from different periods side-by-side. You can also compare your income statements with your competitors as an official document open to the public.
By comparing your small business's income statement from one year to the next, for instance, analysts can get a clear picture of its financial health.
MPOM Pet Supplies
Income Statement
For Years Ended December 31
| (In thousands of dollars) | |||
| 2019 | 2020 | 2021 |
Parts of the Income Statement
By now, you may realize the three main sections of an income statement—the revenue, the expenses, and the net income. This income statement format is simple enough. However, businesses have different ways to earn income, such as sales from goods sold or services, and spend their cash, such as administrative expenses.
Common items found in any income statement are:
Revenue
This is the first line item you'll put on your income statement. It represents the total cash your online business has earned in a year, for example. Remember, your revenue is different from profit. Profit is determined by subtracting your total expenses from your total revenue. So, in the sample income statement, MPOM had $57,000 in sales and $50,922 in expenses. Thus, its profit would be $10,478.
Cost of Goods Sold
This item is your business's direct costs from manufacturing your products or honing your services. This item includes the cost of materials, overhead costs, training, and labor used to produce the goods.
But COGS does not include indirect costs, such as shipping or marketing. The COGS formula is
COGS = beginning inventory + purchases - ending inventory
All businesses should aim to reduce their COGS to increase profitability. You can accomplish this by negotiating better deals with suppliers or manufacturing products more efficiently. Generally, the lower a company's COGS, its profits will be higher.
Gross Profit
Total sales minus the cost of goods sold is your gross income or profit. Then, you evaluate your gross profit margin. This metric is the ratio of your gross profit to your total sales. You can use the gross profit to recognize your online business's financial health and pricing strategy.
For instance, if you have a high gross profit margin, you are selling your products at a higher price than your competitors. Meanwhile, you are overspending on production costs if you have a low margin of gross profit.
Operating Expenses
What expenses maintain your business door open? Also known as the general and administrative expense, an operating expense involves expenditures that don't directly relate to making your products or services. It commonly includes:
- Rent
- Payroll
- Travel
- Utilities
- Insurance
- Maintenance and repairs
- Property taxes
- Office supplies
- Advertising
Taxes and Interest
EBIT, or earnings before interest and taxes, measures your business's profitability. It essentially represents the company's operating income or the amount of money it makes from its core business activities before deducting interest and taxes.
Taxes are government-required expenses, and interest is the cost of your borrowings, such as cash loans.
Interest Income
Other income is a category on the income statement that includes interest income and gains on the sale of assets. For example, you can receive revenue from bank interest while adding the income from selling your equipment or tangible assets to your final profit.
Net Income/Loss
The final figure in an income statement is the net income or net profit. It shows how much money you will actually get after deducting all of your expenses. To calculate net profit, you subtract your total expenses from total revenue or your taxes and interest expense from your EBIT.
If the result is positive, the company has made a profit. If the result is negative, your business incurs a net loss. Net income can fluctuate from month to month or year, depending on various factors such as sales revenue, direct cost, and interest rates.
Prepare Your Financial Reports With Unloop
As an online entrepreneur, it's important to keep a close eye on your finances. After all, you can't continue your operations without a good bottom line.
One of the best ways to stay on top of your finances is to prepare an income statement and analyze it. If you need help interpreting your numbers, don't hesitate to ask Unloop for our professional advice, ensuring that your business will always be profitable.
If you have a financial tool on hand, pair it with our easy income statement template. Download it now!