Simple Guide to Preparing an Income Statement
This guide walks you through the eight essential steps to create an income statement that accurately reflects your business's financial performance. Whether you're preparing for quarterly reporting, annual tax filing, or just keeping track of your business health, following these straightforward steps will help you produce a professional income statement with confidence.

by JOE DICHIARA CPA

Getting Started: What You'll Need
1
Financial Records
Gather all revenue and expense documentation for the time period you're reporting on. This includes sales receipts, invoices, expense reports, and bank statements.
2
Time Period
Decide whether you're creating a monthly, quarterly, or annual income statement. Consistency in reporting periods helps with future comparisons.
3
Calculation Tools
Have a calculator ready or set up a spreadsheet template that you can reuse for future statements. Spreadsheet programs offer built-in formulas to reduce errors.
Before diving into calculations, ensure all your financial data is organized chronologically and separated by category. This preparation will streamline the entire process and help prevent oversight of important transactions.
Setting Up Your Document and Recording Revenue
Document Setup
Begin by creating a professional header that clearly identifies your company and the reporting period:
[COMPANY NAME] INCOME STATEMENT FOR THE PERIOD ENDING [DATE]
This immediately communicates to readers what they're looking at and for what time period the financial information applies.
Recording Revenue
List all sources of income your business generated during the reporting period:
  • Sales revenue from products
  • Service revenue from provided services
  • Interest income from investments
  • Other income (royalties, rent, etc.)
Add these figures to calculate your total revenue—the top-line figure that shows all money flowing into your business.
Cost of Goods Sold and Gross Profit Calculation
Identify Direct Costs
Include all costs directly tied to producing your goods or delivering your services: raw materials purchased, direct labor costs for production staff, and manufacturing overhead like factory utilities.
Total Your COGS
Add all these direct costs together to get your total Cost of Goods Sold figure. This represents what it cost your business to create the products or services that generated your revenue.
Calculate Gross Profit
Subtract your total COGS from your total revenue. The resulting figure—your gross profit—shows how much money remains to cover operating expenses and potentially generate profit.
Gross Profit = Total Revenue - Cost of Goods Sold
This figure is crucial as it indicates your basic profitability before considering the costs of running your business. A healthy gross profit margin suggests efficient production processes and appropriate pricing strategies.
Listing and Calculating Operating Expenses
Operating expenses include all the costs associated with running your business that aren't directly tied to production. These expenses occur regardless of how much you produce or sell.
Common Operating Expenses
  • Salaries and wages for non-production staff
  • Rent and facility costs
  • Utilities like electricity, water, internet
  • Office supplies and equipment
  • Marketing and advertising expenses
  • Business insurance premiums
  • Depreciation of assets
  • Professional services (legal, accounting)
Calculating the Total
List each expense category separately with its corresponding amount. Then add all expense values to calculate your total operating expenses. This figure represents the cost of keeping your business running during the reporting period.
Monitoring these expenses over time helps identify areas where costs might be reduced to improve profitability. Remember to keep receipts and documentation for all expenses for tax purposes and financial accuracy.
Calculating Operating Income and Other Items
1
Calculate Operating Income
Subtract your total operating expenses from your gross profit. The result—operating income—shows how much your core business operations generated before accounting for non-operational items.
2
Identify Other Income and Expenses
List financial items not related to regular operations: interest payments on loans, gains or losses from selling assets, income from investments, and one-time expenses or windfalls.
3
Include Tax Provisions
If applicable, include any provisions for income taxes that will be paid on your profits. This is particularly important for annual statements.
Operating Income = Gross Profit - Operating Expenses
This figure is significant because it reflects the profitability of your primary business activities before considering financing decisions and other external factors. It's often used to evaluate management effectiveness and operational efficiency.
Determining Net Income and Finalization
The final step in preparing your income statement is calculating net income, which represents your bottom-line profit or loss after all revenues and expenses have been accounted for.
Calculate Net Income
Net Income = Operating Income + Other Income - Other Expenses - Taxes
This figure tells you whether your business operated at a profit or loss during the reporting period.
Review for Accuracy
Double-check all calculations and ensure that every relevant revenue and expense item has been included. Verify that documentation exists for all figures on your statement.
Format Final Document
Ensure your statement follows a clean, professional format with clear headings, consistent decimal alignment, and proper subtotals. This makes the document easier to read and analyze.
Your completed income statement provides valuable insights into your business's financial health and performance. Use it to identify trends, make informed decisions, and plan for the future.
Complete Income Statement Example and Final Tips
1
Remember the Purpose
Unlike a balance sheet which provides a snapshot of assets and liabilities at a specific moment, the income statement shows performance over time—revealing whether your business is profitable and how that profitability is trending.
2
Be Consistent
Use the same categories and calculations each time you prepare an income statement to ensure meaningful comparisons across different periods.
3
Use It for Decision-Making
Regularly review your income statements to identify opportunities for increasing revenue, reducing costs, and improving overall profitability.