The Income Statement
I started covering some of the basic accounting terms on Tuesday. On Wednesday I covered why Rich Dad says accounting is important and that if you are financially illiterate you will be stuck where you are.
Today I want to start putting accounting into action! This is where the fun starts but I’m going to take things slow.
The Income Statement
The Income Statement is the most important accounting document because it shows if a business is profitable or not. If the revenues exceed the expenses the company is in good shape and a net income is earned. If the expenses are greater than the revenue it is a net loss.
Notice the income statement does more than just show a total for revenues and expenses, it shows the categories within them. This helps decision-makers understand more about how the business operates like which areas are most profitable or where the greatest expenses are.
Revenue represents assets or anything that puts money in your pocket. Expenses represent the money burned to get the revenue.
An income statement should have the company name at the top with the document title and date represented just below. Time is critical for decision-makers to understand the numbers. If the document wasn’t dated, the $2,200 profit could be over the course of a day, month, year or some other period of time. Without a time line to frame the finances in, the information is out of context.
Also, take a look at the formating with the indented categories. And notice how the expenses are on the left and revenue is on the right. It is important to line these numbers up in the correct columns to help facilitate the reading and to make it clear what money is coming in or going out.
The source file for the image above is available for download here: Sample Income Statement. Take a look at how everything is laid out and try plugging your own numbers in to see your business the way an investor might.
August 7th, 2011 at 5:28 pm
Another copy and paste blog post? Yours,
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