10 Step-by-Step Process For Businesses to Prepare Income Statements

Generating trial balance reports, revenue calculation, determination of the value of goods sold & gross margin. operational expenses, income/Income taxes/net income calculation, and all business details inclusive of the reporting period are called an Income statement. Preparing an income statement template helps businesses not to struggle much for developing statemental information right from the scratch. 

With various platforming catering, preformatted statements as per business requirements do businesses should choose to stick along it. For preparing income statements, small businesses must extensively analyze/report their expenses, revenues, resultant profits/losses side by side within a specific period. Otherwise termed as a profit/loss statement, this major financial statement comes concurrent with the balance sheet and cash flow statement. When the balance sheet snapshots the summaries of assets, debts, and equities of a company, cash flow statements give forward a detailed report of generated and spend amount. Revealing the profit a business generates and its expenses during a specific period, Income statements indicates revenue expenditures changed into net income or net profit. This article is aimed at acknowledging businesses how to generate an income statement and its differences from a balance sheet. With 10+ years of experience, OURS GLOBAL’s Financial Analysis & Reporting Outsourcing Services attends to the requirement of client businesses in the development of predictive financial statements, with spreadsheet assumptions by approaching with standardized reporting/accounting, preparation of balance sheets, income/cash flow statements, ratios & key financial KPI’s.    

Incorporating templates from Microsoft Word or Google words and later customize them with respective content can be a good start. Ascertaining revenue generated and developing a performance statement side by side with other financial statements, businesses can generate income statements with the following steps.  

Following is the Step-by-Step Process For Businesses to Prepare Income Statements:  

1. Singling Out Reporting Period

To start with choosing a reporting period annually, monthly, or quarterly basis in which they have to cover. While small businesses don’t have heavy regulations for their reporting, publically traded companies are required to develop financial statements on an annual or quarterly basis. By generating monthly income statements, businesses can easily identify industry trends, customer behaviors, and purchase trends, thus enriching efficiency and profitability within the organization. 

2. Trial Balance Reporting

Printing out standardized trial balance reports is the best to start with the development of income statements for businesses. Generated from internal accounting information from the end balance of accounts in general ledgers for a particular reporting period, trial balance reporting can also be formulated with cloud-based accounting software. With balance sheets developing an income statement is quite easy and simplifies data collection related to account balances. Such efforts will infer end balance figures that are required for compiling an income statement. 

3. Revenue Calculation

Passing on to the next phase, calculation of a business’s total revenue for a particular reporting period, inclusive of cumulative money earning over the same time will enable compilation of revenue value. All payments that are not yet received should be recorded too. The addition of trial balance reports especially the total amount of revenue line items is to be followed.   Using appropriate accounting formula- Number of units sold x average price, businesses can be accurate in the calculation of income statements. 

4. Value of Goods Sold

The product’s/good’s/ Service’s value comprises of the skilled labor, materials used, and overhead expenses that have been into the application for manufacturing the same. The addition of the cost of goods along with the trial balance reports and listing of total good costs over income statements, under the revenue line item, will ensure moving forward to the next step. 

5. Calculation of Gross Margin

Deducting good costs off from the total revenue on income statements will directly give the gross margin. This is the gross margin of profit from a business’s investment in the sale of its goods and services.  

6. Taking in Operational Expenses

Addition of all comprehensive operating expenses that are noted in the trial balance report, with each expense subjected to double verification for accuracy. The addition of the cumulative amount into the income statement as the selling and administrative expenses line item will direct below the gross margin line. 

7. Computation of Overall Income

Deducting all administrative and selling expenses from the gross profit margin will compute the amount of pre-tax income. The amount thus compiled should be entered at the bottom of the income statement. 

8. Appending Income Taxes

Multiplying applicable state tax rates with pre-tax income figures will give businesses their obligation in paying the government as their taxes. The addition of the resultant to the income statement will give the pre-tax income figure.

9. Compilation of Net Income

Taking off the income-tax figures from the business’s net income will ensure the determination of the business’s net income. Deriving businesses with a general understanding of the financial performance, also make the businesses capable of assessing the profitability in a bigger picture. 

10. Wrapping Up the Income Statement

The addition of business details and reporting period covered by the income statement and adding headers will ensure reporting identification is covered by the same. By compiling all data businesses can thus deliver an accurate statement. Infer a future understanding of the income statement definition that will be of great benefit to businesses and their practices.

Following are the Key Differences Between the Balance Sheet and the Income Statement:

  • When an income statement reports financial activities for a particular period, whereas a balance sheet reports financial activity giving a snapshot view of a business’s finances.
  • An income statement reports on a business’s revenues and expenses inferring the losses and profits. But a balance sheet gives a detailed report of a company’s assets, liabilities, and equity.
  • The income statement will report the comprehensive business financial performance and the earning generated. Whereas a balance sheet helps analyzation of liquidity assets for covering its financial obligations. 

Stated above are the step-by-step processes for the preparation of income statements. Balancing accounting books and calculating a company’s financial health will reveal it’s the company revenues and expenses in a period as per business requirements. Indicating income statements and the transformation of revenues into net income or net profit income statements is a method of verification for profits and losses. 

This crucial financial statement also makes sure to open out over the business’s income and expenditures, with a detailed explanation of net income or net profits. OUR’S GLOBAL Financial Analysis and Reporting Services come together with well-qualified and experienced accounting professionals for providing businesses with insights and guidance. Get in touch with us for tax advice on accountancy operations.  

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