What is an Income Statement?

What is an Income Statement?

Definition

An income statement provides details about a firm’s earnings or income for a certain period. It reduces the company’s revenues by its total expenses to arrive at the net income. The income statement is one of the most important financial accounting statements prepared by a firm.

What does income statement mean?

The revenue and expense figures in the income statement are taken from the firm’s adjusted trial balance. If the total revenues exceed the sum of expenses, the firm would have made a profit in the accounting period under consideration. Conversely, if the expenses are more than the revenues, the firm would have made a loss.

An income statement is also known as a profit and loss statement, an earnings statement, or a statement of operations.
It is important to note that an income statement includes revenues and expenses from both operating and non-operating activities.
An income statement could be prepared for a month, a quarter, or for the entire financial year.
The net income that a company earns in a year can be used for two purposes. Some portion may be paid to shareholders as a dividend. The remaining amount would go towards increasing the company’s retained earnings.

Example of income statement

Hamilton Electricals makes switchboards and other electrical equipment. This is its income statement for the year ended December 31, 2017: Income statement example
Hamilton Electricals has made a net income of $118,000 for the year 2017. This information is of interest to the company’s shareholders and its lenders.

The shareholders of Hamilton Electricals will benefit from the profits that the company has made. The net income of $118,000 could be used to pay a dividend or to increase the company’s retained earnings.

As the company is profitable, its lenders would be assured that they would receive their interest payments in a timely manner.

Summary

In its simplest form, an income statement is a calculation of revenues minus expenses. It summarizes a firm’s historical financial results for a certain period.