How is an income statement structured?

The income statement contrasts the expenses and revenues of a company. The difference results in the profit, which, contrary to common language, can be either a gain or a loss.

In addition to the balance sheet, which shows the assets and liabilities of a company (see blog post), the income statement, which represents the profits and losses from operational activities, is also part of the accounting. The income statement is basically a comparison of expenses and revenues. From the difference between expenses and revenues, a profit is generated, which can be either a gain or a loss.‍

Expense

‍Producing goods and providing services incur costs for the company by, for example, purchasing materials, paying wages to staff, depreciating equipment, or advertising products. This consumption of value is called expenses in accounting.

‍Revenue

‍The sale of products or delivery of services brings money into the business and thus constitutes an increase in value, which is also called revenue in accounting.

An income statement is always prepared for a specific period and then starts over from the beginning (depending on the company: monthly, quarterly, semi-annually, or annually).

Success equals the balance of the income statement, which is why it is also commonly called the profit and loss statement. There is no clear order of the expense and revenue accounts and can be determined by each company itself.

‍Depreciation

‍A particularity are fixed assets such as vehicles, buildings, machinery, and office furnishings, which are used for several years. They are recorded as an increase in fixed assets in an active account in the balance sheet upon purchase. The consumption of value through the use and wear of these fixed assets (e.g., a vehicle is only worth a fraction of the purchase price after 10 years of use) is also referred to as depreciation and is recorded as an expense in the income statement.

Influence on Net Assets

‍The net assets or equity of a company results from the difference between assets and liabilities in the balance sheet (see blog entry). All transactions affecting profit (usually those transactions that trigger an entry in the income statement) always influence the net assets of the company. Expense entries lead to a decrease in net assets (purchasing materials costs money), whereas revenue entries lead to an increase in net assets (selling products brings money into the cash register).

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