The income statement, also known as the profit and loss statement, is an important tool as it calculates the profitability or loss of a business.
Income statements are vital to an organization because it offers valuable insight to how the business is, and can identify any inefficiencies. It provides insight into operations of the business, the efficiency of management, and can benchmark against competition. There is much valuable information in the income statement when the reader understands what it is reading, such as understanding the expenses of your business and how they contribute to your sales.
When you subtract all the expenses from all the revenue earned in that same period, your number will either be positive or negative. If the number is positive that means the business has earned a profit in that period. If the number is negative, that means that the company has incurred a loss. When you create a financial plan for your business, whether it be a budget or a forecast, the format of that plan is based on the income statement.
Profit needs to be consistent for a business to stay afloat. Occasional losses may be absorbed by the company if the company is in a good financial position.1. Tracks performance of your business Knowing how profitable your business is essential information to have. The format of the income statement allows you to easily read and understand if and how profitable your business is. The income statement shows all the revenue received in a period less all the expenses paid in that same period.
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