How To Prepare an Income Statement

Income sheets with calculator

Knowing how to prepare an income statement is critical for any businessman.  Online business classes can help you with this.

One of the most important financial statements to a businessman is the income statement. Also called the profit and loss statement, an income statement allows the businessman to immediately determine in one glance whether his business is profitable or not. It would very helpful for any businessman to learn how to prepare and income statement. There are many commercially available accounting software that are specifically tailored for this particular task.

To prepare an income statement, you will need to look over at your business’ general ledger. Simply defined, a general ledger is your business’ financial diary. It is a daily accounting record of any changes in your company’s assets, liabilities, revenues, expenses, gains, losses, and owner’s equity. It is usually supported by subsidiary ledgers, especially in large businesses.

You need make adjustments to entries in your general ledger before you can start preparing an income statement. Adjustments are made to ensure that all figures are reconciled and balanced. To do this, you will need to create a worksheet called trial balance. This worksheet is required to ensure that all figures in your general ledger are accurate. 

Once you have done all this, then you are ready to prepare the income statement. The first step to undertake is to determine you total revenues for the accounting period at issue. Revenues are either sales of products, or fees earned for services rendered. It is very important to correctly label revenues as sales and fees, especially if your business provides both. Other factors affecting your total revenue are rents, interest, dividends, discounts, and gains from sale of assets. Add and subtract these items as their nature requires.

Once you have determined your total revenues, then your next course of action is to determine your total expenses. As the name implies, this section adds up all the expenses incurred in the operation of the business for the accounting period at issue. Common expense items include wages, rents, utilities, insurance, and supplies. Interest expense, taxes, and losses from the sale of assets are also classified as expense. Small variable expenses that do not fall under the categories mentioned above are usually lumped under the “miscellaneous expense” line item. It is very important to include all expenses no matter how small they are. Add these items up and you will get your total expense for the period.

Now you that you determined you total revenues and total expense, you can find out your net income. This is computed by subtracting your total expenses from the total revenues. Once you have gotten your net income, then you have finished your income statement. The whole process of preparing the income statement outlined here is called the Single-Step method.

Remember, keeping good records is vital to preparing an accurate income statement, or any financial statement for that matter. Thus, you should keep accurate entries of your business’ financial transactions in your general ledger. Keeping accurate figures will make the process of preparing an income statement easier for you.  Other great tips can be learned through online business management courses.


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