The Three Most Important Parts of an Income Statement

The three most important parts of an income statement are revenues, expenses and the period's net result. Note that the reporting period typically is a month, quarter or fiscal year, but a time frame in between is not unusual. In a financial lexicon, phrases such as "statement of profit and loss," "income statement," and "report on income" are interchangeable.

Revenues

For a company, growing revenues period after period is essential to prevent investor exodus and to retain the confidence and loyalty of business partners as diverse as customers, vendors and service providers. The last group includes insurers, landlords, contractors and utilities companies. If an organization doesn't make money, its days in the competitive space are numbered, and rivals quickly will fill the commercial gap if the business eventually files for bankruptcy. The corporation can make money by selling merchandise, providing services or both. Other revenue items include vendor rebates, investment gains and fiscal refunds.

Expenses

If a company's leadership takes the issue of expense management seriously, it's because runaway deficits and operating losses generally pose a jarring setback for senior executives' commercial ambitions. A runaway budget deficit happens when expenses grow more quickly than revenue items, and department heads can't keep operating charges in check. These run the gamut from material expense to selling, general and administrative charges -- the kind that touch on everything from salaries and litigation to office supplies, interest and insurance.

Net Result

To calculate a company's net result at the end of the reporting period, subtract total expenses from total revenue. Finance people say net income occurs when revenue items exceed expenses; otherwise, it's a net loss. In addition to an income statement, a company's net result flows into the retained earnings master account, which happens when the business closes its books. Retained earnings are integral to a statement of changes in shareholders' equity, also referred to as an equity report or statement of retained earnings.

Bowing to Competitive Tedium

Knowing how to interpret the three most important parts on an income statement can help you figure out whether a company is bowing to competitive tedium or whether it's successfully dodging rivals' tactical bullets. In simpler terms, you can tell whether the business is making money or barely making operating ends meet by delving into its income statement. For example, if the corporation's five-year profitability information is rosy and on the rise, this is a telltale sign that top leadership is doing a good job growing sales and expanding market share.

References

• The Ohio State University Fact Sheet; The Profit and Loss Statement -- What Does It Mean?; Marianne M. Huey
• University of Glamorgan: Profit and Loss
• "Independent Mail"; Income Statements Provide Tools for Better Decision Making; Joe Sangl; May 2009
• Bookkeeping Essentials: How to Read the Income Statement