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What Is an Income Statement? - Purpose, Components & Format

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  • 0:03 Introducing the Income…
  • 0:29 Income Statement Components
  • 1:18 Purpose of Income Statement
  • 2:09 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

There are four financial reports that are created during the accounting cycle. These four reports make up what is commonly known as the financial statements. In this lesson, we will focus our attention on the income statement. We will learn what the income statement is, what its role in the financial statements is, and why it is important in accounting.

Introducing the Income Statement

The Financial Statements are the most popular band in all of accounting. Of the four members that make up the band, the income statement, known as Issy, is the very first one. Income statement is the member of The Financial Statements that tells fans whether or not a company made a profit or incurred a loss in an accounting period. In everyday terms, the income statement tells whether a company made money or lost money in a certain amount of time.

Income Statement Components

Issy is quite an interesting character and pretty easy to figure out. All you have to know are two simple things: revenue and expenses. If you know those two things, you can totally figure him out. All you have to do is use this simple formula: Revenue - Expenses = Net Income.

Revenue is the money that a company takes in. Expenses are the money that a company pays out. Net income is the amount of money that is left after a company subtracts their expenses from their revenue.

Everybody loves to see Issy when he shows that a company had a net income, but what happens if it doesn't? If expenses are more than the revenue brought in, then the company had a net loss. Fans aren't that fond of a net loss, because it means that the company didn't make any money!

Purpose of Income Statements

Now that you know what it is that makes Issy who he is, let's take a look at what role he plays in The Financial Statements. The main thing that fans want to know from Issy is the bottom-line profit or loss that a business had in a certain time period. The numbers used to calculate that bottom-line figure are cumulative, meaning that they are a total of all activities from the beginning of the chosen time period until the end of the chosen time period. Most income statements are generated on a quarterly or annual basis.

Fans want Issy to tell them whether a business is operating efficiently and would be a good credit or investment partner or if it's not. Business owners depend on Issy to tell them if the business is running efficiently or if there are areas that need improvement. Regardless of why fans are interested in Issy, it is obvious that he carries a lot of weight as a member of The Financial Statements!

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