What is an income statement?
The income statement is a financial statement that reports a company’s financial position performance over an accounting period. This statement primarily focuses on a company’s revenue and expenses. The income statement adheres to the accounting principles of:
Net income = (Revenue + Gains) - (Expenses + Losses). Revenue is separated into 2 parts, Operating revenue, and Non-Operating Revenue. Operating Revenues are revenues that are directly derived from the primary activities of a business. For example, a bakery’s operating revenues would come from sales of pastries. Non-Operating Revenue is revenues that come from non-core business activities. An example of this is rent income, royalties, or interest from a loan. Gains are other income that is derived from the net money made from activities such as sales of long-term assets like land and buildings.
Expenses are the costs derived from continued operations. Examples of expenses include wages, Cost of Goods Sold (COGS), depreciation, utilities, rent, ETC. Expenses can be divided into primary and secondary. Primary being expenses from core business activities and secondary being expenses linked to non-core activities (interest paid on a loan). Losses come from things like losing money on a sale of a long-term asset or payments for a lawsuit. The reason Losses and Gains are separated is so that revenue and expenses can accurately depict how well the core business is performing.
For more information on this topic, check out this article from our friends at Investopedia.