What is an Income Statement and Why Is It Important?

What is an Income Statement and Why Is It Important?

Table of Contents
Table of Contents

Everything you need to know about the income statement - from the definition of what income statement to the reasons why businesses need to prepare an income statement.

Photo by Micheile Henderson on Unsplash

In addition to balance sheet and cash flow of statement, the income statement is also part of the financial statements prepared by all the organizations.

The purpose of an income statement is to provide financial information to investors, creditors, and readers, whether the company is profitable during the financial year.

In the context of corporate finance, the income statement is the record of the company's profit and loss over the financial year. The company's net profit is derived by deducting the total revenue from all the expenses incurred for operating and non-operating activities.

There are various monikers associated with the income statement, such as:

  • Profit and Loss Statement
  • Statement of earnings
  • Statement of income
  • Revenue statement
  • Statement of operations

All these income statement terms mean the same thing, and it's often used interchangeably. However, the Profit and Loss Statement is still the most popular term used by most financial professionals.

Do you wish to find out more about the income statement? Check it out here to find out how different industries in the market prepare their income statements.

Why is the Income Statement Important?

Analyzing the next right decision to make based on the financial statements.
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In the corporate world, preparing an income statement is a monthly, quarterly, and even yearly affair. Every year, businesses will generate income statement reports without fail.

Here are some great reasons why preparing an income statement is such a crucial task in every organization regardless size:

  • Assist in better decision making - Reading the income statement enables the business owners to be aware of the current financial footing of the company. With the accurate figures presented on the income statement, business owners can make swift and wise decisions about the company's expenditure.
  • Track the company's profitability - With an income statement, it provided the business owner, the shareholders, and stakeholders the knowledge of the company's financial standing.
  • Essential report for compliance - Operating your business in a country means companies will have to bear the various forms of business taxes, following the tax regulations of that country. Paying business taxes is mandatory by law. To calculate your tax liability, the income statement, and other financial statements (balance sheet and cash flow statement) will help a lot in providing the necessary financial data you will need.

Types of Income Statements

A Guide to Understanding Balance Sheet

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