An income statement is a financial form that just about every business should create periodically. The statement is used both for the benefit of the business owner or manager and the benefit of shareholders in the case of a corporation. Learn about the various business transactions that commonly affect an income statement.
As the name of this financial statement suggests, the income to the business is the most important elements of an income statement. You must record the total of all sales or revenues that came into the business during the period (usually a quarter or year). You also must account for any returns you’ve received from customers. If the company sells tangible products, deduct cost of goods sold (COGS) transactions (merchandise purchased to make your products) to determine the actual amount of income after product-related costs.
Another important transaction that affects the result of the income statement is the expenditure on employees. Employee salaries often take up a large amount of the income that a business takes in each period. Besides the base salaries, other employee-related transactions may include benefits, rewards programs, training and reimbursements for employee business trips.
Overhead and Advertising
The overhead costs that a business must cover in order to maintain operations also affect the income statement. Overhead includes the cost of lights, supplies, phone service, repairs and rent. Like employee expenses, these costs are crucial to your company’s income-generating process. Also, if your company invests in advertising and promotion campaigns, these expenditures also reduce the total net income recorded on the statement.
The sum of tax-related transactions for the period also appear on the income statement. Tax transactions include income taxes the business must pay, which may include corporate tax expenses if the company is a corporate entity. If the company has to pay a license renewal fee each period, such as the cost of a liquor license renewal for a restaurant, that transaction also affects the income statement.