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Income Statement | Prepare the Right Way

How to Prepare an Income Statement

An income statement is one of the most common, and critical, of the financial statements you’re likely to encounter. Also known as profit and loss (P&L) statements, income statements summarize all income and expenses over a given period, including the cumulative impact of revenue, gain, expense, and loss transactions.

Below are steps to follow when preparing an income statement

Print the Trial Balance

Print the “trial balance” standard report from your accounting software. This is a summary report that includes the final balance of each account in the general ledger.

Calculate the Revenue Amount

Add up all of the revenue line items on the trial balance and enter the total into the income statement’s revenue line item.

Calculate the Cost of Goods Sold

Add the total of all cost of goods sold line items on the trial balance to the cost of goods sold line item on the income statement. Direct labor, direct materials, and factory overhead are typically included in the cost of goods sold. This line is directly beneath the revenue line item.

Calculate the Gross Margin

To calculate the gross margin, subtract the cost of goods sold from the revenue figure. This is the total amount made from the sale of goods and services.

Calculate Operating Expenses

Add all of the expense line items in the trial balance that are less than the cost of goods sold, and then add the total to the selling and administrative expenses line item in the income statement. This line is directly beneath the gross margin line item.

Calculate Income

Subtract operating expenses from gross profit to arrive at total income. This figure represents the pre-tax income generated by your company during the reporting period. This is also known as earnings before interest and taxes (EBIT).

Calculate the Income Tax

To calculate the income tax expense, multiply the applicable tax rate by the pre-tax income figure. Subtract this amount from your pre-tax income and record it in your accounting records with a journal entry.

Calculate Net Income

Subtract the income tax from the pre-tax income figure and enter the result as the net income figure on the last and final line of the income statement. Another possibility is to include net income as a percentage of revenue.