Lessons · Accounting · the income statement
The income statement: what you earned and what it cost
Revenue for the period, less the expenses of the period, gives the profit or loss for the period. Sales less cost of goods sold is gross profit; gross profit less operating expenses is net profit.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
The owner asks whether the business made money this quarter. This one page is the answer, and it is the page a buyer, a lender and the tax office all read first.
How to think about it
Sales at the top. Subtract the cost of what was sold for gross profit. Subtract the costs of running the place for net profit. Nothing that is an asset, a liability or the owner's own money belongs on it.
Worked example
Sales revenue 80,000The top line, for the period.
Cost of goods sold 48,000 → Gross profit = 80,000 − 48,000 = 32,000What the goods themselves cost. Gross profit is what is left to run the business with.
Operating expenses: rent 12,000 + wages 15,000 = 27,000The cost of keeping the doors open.
Net profit = 32,000 − 27,000 = 5,000The bottom line.
Your turn
Sales 64,000, gross profit 25,000. Write the line with the cost of goods sold filled in.
Gross profit = 64,000 − = 25,000
Solve one, graded on the server
The trap
Putting an asset purchase or a loan repayment on it because cash went out. They change the balance sheet, not the profit, and a computer bought in March does not make March a bad month.