In tax and accounting terms, “income statement” refers to an accounting of a business’s revenue and expenses for a period of time.
This is also often referred to as a “profit and loss” statement (“P and L” for short).
Major Parts of an Income Statement
- Gross profit: This is a business’s gross revenue minus cost of goods sold
- Operating expenses: business deductions other than cost of goods sold
- Net income or net loss: What’s left after taking gross profit minus operating expenses
Note that this is purposely over-simplified for this blog post.
Money In, Money Out
It’s a mistake to assume that an income statement is simply “money in minus money out.”
For some smaller businesses, that might be the case. But an income statement can also include “non-cash” items, such as depreciation.
ABC Company buys a new piece of equipment for $10,000 in 2016. The equipment is depreciated over 5 years and the depreciation deduction for 2016 is $2,000. ABC’s income statement for 2016 will show just a $2,000 expense for depreciation, even though ABC actually spent $10,000 on equipment that year.
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