Income Statement explained

By Randell Tiongson on October 13th, 2012

Even if you are not an Accountant, you would most likely encounter an income statement or other simply refer it to a profit and loss statement. An income statement is very useful to determine the viability of any business and any person. It is used both from a business perspective and should also likewise be used in a personal way. I often say that the principles of corporate finance is the same as personal finance, just varying in application and terminologies.

Income statements are very important to determine the profitability of company and is likewise a good way to determine your personal profitability.

So what is an income statement? A typical definition  is that it is a financial statement that measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Ivestopedia.com has a better way of explaining what an income statement is —

The income statement is the one of the three major financial statements. The other two are the balance sheet and the statement of cash flows. The income statement  is divided into two parts: the operating and non-operating sections.

The portion of the income statement that deals with operating items is interesting to investors and analysts alike because this section discloses information about revenues and expenses that are a direct result of the regular business operations. For example, if a business creates sports equipment, then the operating items section would talk about the revenues and expenses involved with the production of sports equipment.

The non-operating items section discloses revenue and expense information about activities that are not tied directly to a company’s regular operations. For example, if the sport equipment company sold a factory and some old plant equipment, then this information would be in the non-operating items section.

Still confused? Here’s a video that might help…

Whew! It’s a good thing I decided study Economics instead of Accounting 😉

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Income Statement explained