How To Read My Income Statement
Are you a business owner, or someone who one day aspires to be? There’s certainly plenty to learn when it comes to managing a business’ finances. Some parts of your entrepreneurship journey you will learn through experience, research, and asking good questions. But we urge even the most confident entrepreneurs to engage the services of an experienced accounting and bookkeeping firm to help manage their finances.
Once you’ve hired an accountant and bookkeeper, it’s important to understand clearly the documents that they prepare for you. Recently we discussed the balance sheet, and today we want to review another document essential to business accounting basics - the income statement.
To give you the very abridged version, your income statement shows you the money that comes in, and the money that goes out of your company.
Your company’s income includes every dollar that you make in sales and services. For instance, if you own a hair salon you might make income based upon the haircuts and hair colors services that you complete each month, plus income you make on the products that you sell (more on this in the expense section), and even income you make by renting space in your facility for other stylists to see their own clients. Again, every dollar that comes into your business needs to be included in your income statement.
In the expense section of your income statement you’ll include all of the money that you pay out of your business. For example, this section includes your rent, advertising, software purchases, accounting fees, payroll, travel, and more. Plus, going back to our earlier example of the salon owner, you must track your cost of any goods that you sell in your business. Meaning, if you buy a shampoo for ten dollars and sell it for twenty dollars, both parts of the equation must be represented in your income statement.
You may be sitting her thinking, “well, duh!” But we urge you to take this document very seriously, and if a document of this kind is not already being created for you by your accountant or bookkeeper, you might be working with the wrong team. Truly understanding where your money is coming from and going to is vital for you to make wise business decisions, complete your tax returns, and avoid potential penalties with the IRS.
And remember, unlike the hair dresser we mentioned above, tax preparers are not required to be licensed. So as you prepare to grow your business into the future, find an enrolled agent or CPA to help you manage your finances. For more information or to join our family, contact us today.