Knowing how to setup an income statement template is something that you’ll want to know sooner or later in your business career. If you’re just starting your first accounting course in college, then you’ll become an income statement expert over the coming semester. But, if you’re already working in the business world and you just need to brush up on the standard income statement format, then you’re on the right page.
See how this guy makes advanced accounting concepts easy to understand…
While income statements can be very detailed and complicated, most of them follow the same basic format:
Revenues – Expenses = Net Income
Here’s a sample income statement template:
Even if you know how to format an income statement, it won’t mean anything if you don’t understand what the different accounts mean.
A common misunderstanding is that revenues and gains are basically the same thing. They are actually very different things. Revenue is the money earned from primary activities of the business. If you have a business where you get paid to walk dogs, then the money you receive from walking the dogs is your revenue. But, let’s say that you have some really expensive dog collars that are specially made to not choke a dog if the dogs pulls on the leash. So when it’s time to buy more of these expensive dog collars, you figure you’ll sell some of the older ones to some of your customers. You’re not in the business of selling dog collars, but when you liquidate equipment like this, it results in either a gain or a loss. If you sold the used collars for more than their book value, than you had a gain. If you sold them for less than their book value, then you have a loss.
Expenses and losses are another thing that confuse a lot of people. You’ll hear people using these two words interchangeably, but this is far from accurate. Like revenues, expenses are the costs that you incur while engaged in the primary activities of your business. To use the example of the dog walking business again, the money that you spend on gas to get to your different dog walking appointments would be an expense. Another expense would be your walking shoes that you wear while you’re walking the dogs. A loss would be if you were to sell some old equipment for less than its book value. The reason these different types of transactions are listed separately is so that the business owner can see where they are making or losing money, and then make adjustments accordingly. If revenues, expenses, gains, and losses were all lumped together, it would be hard to figure out what areas and issues require attention so that the business can grow and prosper.
If you understand these concepts as well as how to format an income statement template, you might not be a CPA, but it will help you make more informed business decisions. Brushing up on the basics of accounting is a very worthwhile endeavor for any business person worth his or her salt.
