The Income Statement, also called the Profit and Loss Statement, shows how much money a business makes or loses over a specific time period - a month, 3 months, 6 months or a year. Income statements are prepared monthly, quarterly and annually, but never cover a period longer than a year. When income statements are prepared, management or its accountants extract sales and other income totals along with totals of various expenses from internal accounting records. Once expenses are computed, they are subtracted from income and either a profit or loss is shown. The results on the income statement affect the balance sheet from period to period, so it is important to review both statements to determine the full impact each has on the other.

Net sales is derived by adding up the total invoices billed to customers during the period covered, less any discounts taken by customers. Then, any sales returns accepted from customers during the period are deducted. After deductions are made, the remaining figure is net sales.

Gross profit is net sales less the cost of goods sold. Cost of goods sold includes expenses required to manufacture, purchase merchandise and service customers. The cost of goods sold takes in material costs, labor and factory expenses involved in producing merchandise.

Net profit after tax (or net income after tax) is gross profit less all expenses directly applicable to the company's operations, including income taxes. Net profit after tax truly measures the operating success of the company. When total expenses exceed net sales, a minus figure results and a loss has occurred. If there is a surplus (profit), it can be added to retained earnings or distributed to owners and stockholders as withdrawals or dividends. When expenses exceed net sales (when a loss occurs), it is charged against net worth and a reduction in the equity account occurs.

Working capital represents the funds available to finance current business operations. This figure is important as it is used to determine how much excess cash a business has to fund current expenses. Working capital is the difference between current assets and current liabilities. Since a company's sources to pay its current debt come partly from current assets, a business with a comfortable margin should be able to pay its bills and operate successfully. How much working capital is enough depends on the proportion of current assets to current liabilities rather than on the dollar amount of working capital.

Example income statements here.

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