4 Benefits and How to Prepare an Income Statement

In the business world, the income statement is no longer something foreign, but really must be compiled. The reason is, the report serves as a communication tool between the company and the owner.

In some situations and concise, the report is also a requirement for business development. For example, in finding investors, the financial statements become crucial things that must be presented.

Definition and Function of Income Statement

The income statement is the part of the financial report that describes the financial condition of a business. The preparation of these reports is not always the same, depending on the policies of each company.

Usually, companies choose monthly and annual accounting periods to prepare financial statements. These calculations should not be prepared carelessly, because the income statement serves to:

1. Knowing the Business Development

From the financial statements, the company can find out how far the business has developed. Is it in accordance with the plan or even out of the established path.

2. As a Decision-Making Step

If something goes wrong or suffers a loss, the company can immediately develop targeted resolution steps. The hope is that the condition will be handled immediately and not protracted.

3. As Evaluation Material

The income statement contains everything that happens to the company's finances in a period. When there are financial posts that are ineffective, the company can evaluate them in more depth.

4. As a reflection of the company

Finding and working with an investor is not easy. At the very least, the company must be able to convince potential investors that the business it is running is financially healthy and profitable.

    These are the 6 Elements of an Income Statement

    As mentioned above, financial reports cover everything about cash flow. That means, the income statement must contain the following items:

    1. Sales or Revenue

    Sales are income or receipts obtained from the process of sending goods/services to buyers, renters or service users. This sales element is the main source of company income.

    2. Cost of Goods Sold or COGS

    In simple terms, cost prices are costs that are directly related to the production process of a product. These costs consist of labor salaries, equipment, spare parts, etc.

    3. Burdens

    Expenses are all expenses aimed at facilitating the company's interests. In the income statement, there are many types of expenses that must be recorded, such as:

      • Actual expenses: expenses that must be incurred by the company in a certain period.

      • Selling expenses: all costs related to the process of selling goods.

      • Depreciation expense: expense that comes from depreciation of the value of assets, such as vehicles.

      • General and administrative expenses: expenses created to support office activities and needs.

      • Deferred expenses: company expenses to pay for certain goods or services that are still deferred. In other words, the company cannot yet use the goods or services.

      • Bad credit expenses: losses due to unpaid receivables. For example, there are people who are in debt, but are reluctant to pay off the money.

      • Other expenses: expenses that have nothing to do with the production process or the types of expenses above.

    4. Other Income

    Other income is income that does not come from sales of the main product. For example, proceeds from the sale of used sacks or cardboard packaging for raw materials, interest, or dividend income.

    5. Profit or Profit

    In a trading company's income statement, profit is the increase in equity or net assets from economic transactions. These profits are peripheral, meaning they do not come from the company's main transactions.

    6. Losses or losses

    Inversely proportional to profit, loss or loss is a decrease in the value of the company's equity. However, they are both peripheral and occur by chance.

      How to Prepare a Simple Income Statement

      Even though the business is still classified as small, the company still has to prepare a profit and loss report. It doesn't have to be as complete as a big company, you can make it in a simple version. The method:

      1. Determine the Reporting Period

      Generally, companies prepare financial reports in monthly, quarterly and annual periods. However, for small businesses you don't need to structure it strictly.

      However, try to still make an annual profit and loss report, so you can know business developments. That way, you can develop your next marketing strategy.

      2. Make a Transaction Journal

      A transaction journal is a report that records all types of financial transactions in a company with a list of income, expenses and derivative costs.

      3. Enter into the Ledger

      At the end of a period, the general ledger serves as a data source for preparing an income statement. Because the general ledger is integrated with other reports.

      This way, you can see each type of transaction in more detail within a certain period. Make sure not a single transaction is missed.

      4. Prepare a Trial Balance

      If a ledger records transactions in detail, it is different from a trial balance. Because, this balance sheet only displays the total balance for each account which is prepared systematically. Its function is:

      • Recording function: a place to record all data on each account.

      • Correction function: a place to correct all existing records in an accounting cycle.

      • Monitoring function: as a means of monitoring each account in the financial reports.

      • Preparatory function: as a step to prepare the company's financial reports.

      5. Prepare the Profit and Loss Report Format

      Once all the journals and records are ready, the next step is to prepare financial reports to determine the company's profit or loss level.

      This format consists of three main components, namely total income, total expenses, and profit and loss column. The third column is the difference between income and expenses.

      If revenue is greater than total expenses, then the company makes a profit. Vice versa, when the load is higher then you experience losses.

      Types of Profit in Financial Statements

      In large companies, there are several types of profits that appear on the income statement. This distinction aims to make it easier for companies to monitor reports. These types of profits consist of:

      • Gross profit, namely total sales minus COGS.

      • Operating profit, namely gross profit minus general costs, selling costs and administrative costs.

      • Profit before tax, namely operating profit minus interest costs on loans or capital debt.

      • Net profit, namely profit before tax minus income tax.

      In its preparation, financial reports are more complex and detailed. Because the company has many assets and there are far more transactions taking place.

      Therefore, not a few companies choose to use our services. With professional staff and experts in their fields, you can carry out comprehensive consultations.

      PT. Sistem Anugrah Prima also offers a variety of services and programs to simplify the process of creating financial reports, thereby getting more value.
      One of them is through SAP Business One. This program for financial management and so on is very suitable for those of you who are starting a business. With advances in technology, income statements are as easy as snapping your fingers.

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