The income statement, or profit and loss statement (P&L), provides a snapshot of a company's profitability over a specific period, typically completed shortly after the month's end. It details revenues and expenses from the general ledger to calculate gross profit, from which net profit or loss is derived. The statement is crucial for analyzing financial performance and trends, as well as for tax reporting purposes.

1. Accounting 101 Income Statement
The income statement, also known as the profit and loss statement (P & L), allows a business to stop
in time and take a snapshot of the company's profitability. The income statement is usually
completed within a few days after month's end to show the profit or loss for the previous month.
Besides showing previous months figures, the P & L report usually displays a running total of year-
to-date figures.From the General Ledger to the Income Statement
The income statement is an accumulation of the general ledger (GL) accounts that affect
profitability. The general ledger accounts that affect profitability are generally revenue and expense
accounts. The top portion of the P & L statement usually shows the general ledger revenue accounts
and the bottom section shows the general ledger expense accounts balances at months end.
Gross Profit and the Income Statement
In order to figure net profit or loss, the financial statement must use gross profit in the top portion of
the statement. Gross profit is figured by subtracting the GL account for cost of sales (or cost of
goods sold) from the GL sales account. The upper portion of the P & L statement will normally show
sales, along with gross profit as well as the gross profit percentage to sales.
The only actual amount that used to figure profit and loss is the gross profit. For example, let's use
total sales at month end of $100,000 and cost of sale of $60,000.
Gross Profit Example
$100,000 sales$60,000 cost of sales (- minus)$40,000 in gross profit (= equals)Gross profit as a

2. percent of sales equals 40% ($40,000 / $100,00)Creating the Income Statement
In real simple terms, net profit or loss is gross profit less expense. Besides gross profit there can
also be many other types of income that can be used such as inventory adjustments or discounts.
Expenses can also be separated into variable and fixed expenses. As a simplistic example let's use
an auto parts store.
ABC Auto Parts Income Statement for January 2010
Counter Retail GP $9,000Wholesale GP $15,000Accessories GP $5,000Purchase Discounts
$1,000Total Gross Profit $30,000Payroll $11,000Rent $2,000Advertising $2,000Insurance
$1,000Vehicle Maintenance $1,000Utilities $1,000Inventory Control $2,000Total Expense
$20,000Net Profit Before Taxes $10,000 ($30,000 - $20,000)
The income statement is an important analytical tool to measure profitability. It can also be used to
indicate positive and negative trends in expenses as well as sales and gross profits by comparing
previous months' statements. The income statement is also used as a means for paying income taxes.
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