Measuring Performance - The Income Statement

measuring incomeThe economic performance of an organization over a period of time is reported by an income statement. It reports all revenues and expenses over a specific time period. This differs from the balance sheet, which shows the financial status of an organization at a specific point in time.

The main sections of the income statement include:

  • Revenue
  • Expenses
  • Net Income

Revenue is commonly generated through the sale of the company's products. Other sources of revenue include shipping charges, interest from investments and grants from government agencies. Revenues increase owner's equity by increasing the organization's assets.

Expenses are cash or asset outflows to other entities. Organization's require products, services and resources to function. These must be paid for. Examples of expenses are telephone charges, salaries and the cost of the goods the organization sold.

Net Income is what's left over after all expenses have been deducted from revenues, often referred to as "the bottom line", or simply "income". If revenue exceeded expenses during a given time period, then the organization had a net gain and net income was a positive number. If revenues were less than expenses, then the organization had a net loss and net income was a negative number. All or some of the net gains during the given time period may be paid out to the owners in the form of dividends. Alternatively, the net gain can be retained by the organization (called retained earnings) and reinvested.

Below is an example of an Income Statement for a fictitious enterprise called ABC Company Inc. The statement is broken up into two main areas - revenue and expenses. The net income amount is shown at the bottom of the income statement.

example-income-statement

While most financial statements do not include many expense accounts with a zero balance, we have included them here to provide examples of common expense accounts.

Accounting Software to the Rescue

Pretty much any modern accounting system software package will allow you to generate financial statements like the income statement based on the transactions that were entered. This is a big time saver because it makes producing financial statements by hand unnecessary. While it has become easy to create financial statements using software, it's still important to be able to read and interpret the statement.

If you're curious about what a full featured accounting system looks like, take a look at our available accounting software.

 
 
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