{"id":136492,"date":"2024-11-27T15:44:13","date_gmt":"2024-11-27T19:44:13","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=136492"},"modified":"2026-03-23T15:12:54","modified_gmt":"2026-03-23T19:12:54","slug":"income-statement-in-business","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/income-statement-in-business\/","title":{"rendered":"Income Statements in Business: How to Understand the Numbers"},"content":{"rendered":"\n<p>What&#8217;s an income statement in business? How does an income statement track revenue?<\/p>\n\n\n\n<p>The first document any business owner needs to understand is the income statement. This shows whether your company is profitable. According to <em>Financial Intelligence<\/em> by Karen Berman and Joe Knight, an income statement requires careful interpretation.<\/p>\n\n\n\n<p>Keep reading to learn what an income statement tells you about your <a href=\"https:\/\/www.shortform.com\/blog\/financial-health-of-a-company\/\">business&#8217;s financial health<\/a>.<\/p>\n\n\n\n<!--more-->\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-the-income-statement\"><strong>The Income Statement<\/strong><\/h2>\n\n\n\n<p>In essence, an income statement in business (also known as a profit-and-loss statement) lists the amount of revenue your company takes in from the goods and services it sells during a specified period. It then subtracts what those goods and services cost to produce, your standard <a href=\"https:\/\/www.investopedia.com\/terms\/o\/operating_expense.asp\" target=\"_blank\" rel=\"noreferrer noopener\">operating expenses<\/a>, and lastly, your taxes, to show how much profit your business generates. Berman and Knight explain what the income statement shows, how it tracks revenue, and the different ways it can account for expenses.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/lh7-rt.googleusercontent.com\/docsz\/AD_4nXcgdqQkwsQchGVLzJyRcEozq8_jEXmJJZDv34B03VxLwTDodRW9eo1qZl-WYCVOSy5u-yCn4C1lKmES_U_sN97jBMq412QAo2JsUxTrHpUosb2ljiOgomsOdIjPrsPNmAS0sT728g?key=vTavO6SshmjMjoVsL7aq81qy\" alt=\"\" \/><\/figure>\n\n\n\n<p>While this sample income statement may seem straightforward, Berman and Knight insist that <strong>many of the numbers on an income statement involve estimates and assumptions by accountants.<\/strong> For example, in the simplified statement above, the amount listed in \u201csales\u201d may include estimated payments that haven\u2019t been received yet. Understanding those nuances is crucial for managers to accurately assess their company&#8217;s performance.<\/p>\n\n\n\n<p>(Shortform note: At the time of <em>Financial Intelligence<\/em>\u2019s publication, accountants had to <a href=\"https:\/\/www.shortform.com\/blog\/how-to-interpret-data\/\">interpret data<\/a> themselves, but today, <a href=\"https:\/\/www.business.com\/articles\/ai-and-accounting\/\" target=\"_blank\" rel=\"noreferrer noopener\">businesses are turning to artificial intelligence (AI) to make projections and estimates<\/a> for their income statements. AI can improve a statements\u2019 accuracy by speeding up data analysis, reducing human error and processing large amounts of financial data quickly. AI systems can automatically track transactions and categorize expenses, and by analyzing historical patterns, it can predict future budgeting needs and anticipate revenue. Additionally, AI can help detect fraud and prevent misrepresentations from affecting a business\u2019s income statement.)<\/p>\n\n\n\n<p>One of the trickiest parts of the income statement is determining when and how much revenue to report. Berman and Knight explain that <strong>companies can only record revenue when it\u2019s earned,<\/strong> typically when a customer receives a product or service. In some industries, this is simple\u2014you record revenue when someone buys a car part or pays for a haircut. However, in more complicated situations, such as building a factory or providing support for an ongoing government contract, determining exactly when revenue should be recorded on an income statement involves significant judgment\u2014such as whether to report it all at the point of sale or to spread the revenue out over several quarters or years.<\/p>\n\n\n\n<p>(Shortform note: A variation of the rule that Berman and Knight cite above is the \u201c<a href=\"https:\/\/www.investopedia.com\/terms\/p\/percentage-of-completion-method.asp\" target=\"_blank\" rel=\"noreferrer noopener\">percentage of completion method<\/a>\u201d of recording revenue for ongoing projects. This method involves reporting revenue on an incremental basis, comparing your current income and expenses to the total estimated costs of a project. To use this method of recording revenue, two conditions must be met\u2014your company\u2019s ability to collect payment must be guaranteed, and your ability to estimate your total costs and when your project will be completed must be reasonably accurate. Businesses that use this accounting method include construction firms, defense contractors, and software development companies with long-term projects.)<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-recording-expenses\">Recording Expenses<\/h3>\n\n\n\n<p>You also have flexibility in how to report expenses on your income statement. Different expenses may be included in the <a href=\"https:\/\/www.investopedia.com\/terms\/c\/cogs.asp\" target=\"_blank\" rel=\"noreferrer noopener\">cost of goods sold<\/a> or as operating expenses, and the dividing line isn\u2019t always clear. Berman and Knight explain that operating expenses are spread out over time, but <strong>the cost of goods sold must be reported in the same period as the revenue from those goods.<\/strong> For instance, in the sample income statement above, the cost of goods can include inventory purchased <em>prior <\/em>to the month it was sold. How expenses are classified can affect <a href=\"https:\/\/www.shortform.com\/blog\/hub\/professional\/business\/business-performance-metrics\/\">key metrics<\/a> such as <a href=\"https:\/\/www.investopedia.com\/terms\/g\/grossprofit.asp\" target=\"_blank\" rel=\"noreferrer noopener\">gross profit<\/a> (revenue minus the cost of goods), so shifting an expense from one line to another can impact how profitable a good or service appears on the statement.<\/p>\n\n\n\n<p>(Shortform note: In service industries that don\u2019t sell products, the cost of goods sold is often replaced by the cost of services, also known as the \u201c<a href=\"https:\/\/blog.projectionhub.com\/what-is-cost-of-goods-sold-for-a-service-business\/\" target=\"_blank\" rel=\"noreferrer noopener\">cost of revenue<\/a>.\u201d Berman and Knight mention this concept, but they don\u2019t explain how to calculate it. For instance, it may include the wages of employees directly involved in providing a service to your clients, but not wages that aren\u2019t directly tied to the services rendered. Any materials or supplies directly used in providing the service are included, as well as the cost of any subcontractors employed to deliver the service. As with cost of goods sold, any expenses solely incurred to keep the business running are instead listed as operating costs, not cost of services, on the income statement.)<\/p>\n\n\n\n<p>Berman and Knight also discuss noncash expenses, such as depreciation and amortization, that have a major impact on reported profits. <a href=\"https:\/\/www.investopedia.com\/terms\/d\/depreciation.asp\" target=\"_blank\" rel=\"noreferrer noopener\">Depreciation<\/a> is the cost of a physical asset, such as a building or a piece of equipment, divided across its projected lifetime. <a href=\"https:\/\/www.investopedia.com\/terms\/a\/amortization.asp\" target=\"_blank\" rel=\"noreferrer noopener\">Amortization<\/a> is the same basic concept, but applied to intangible assets such as patents. <strong>Companies have discretion in estimating the useful life of assets and how quickly to depreciate them.<\/strong> If your accountants change depreciation assumptions, such as deciding that a fleet of trucks will last seven years instead of five, that can significantly alter the income statement\u2019s profit line. Therefore, managers should know what assumptions are being used for all their major assets.<\/p>\n\n\n\n<p>(Shortform note: Though businesses can decide <em>how <\/em>to depreciate assets, in the US they\u2019re <a href=\"https:\/\/www.wolterskluwer.com\/en\/expert-insights\/depreciation-methods-are-constrained-by-legal-requirements\" target=\"_blank\" rel=\"noreferrer noopener\">legally required to depreciate assets<\/a> in one way or another. However, how to amortize intangible assets is becoming increasingly complex in the digital age, when those assets can include <a href=\"https:\/\/accountingforeveryone.com\/how-are-capital-expenditures-for-new-technology-development-such-as-advanced-algorithms-and-ai-infrastructure-recorded-and-amortized-in-the-accounting-system\/\" target=\"_blank\" rel=\"noreferrer noopener\">AI algorithms and software<\/a> that are constantly changing over time. Berman and Knight\u2019s financial rules still apply, but estimating the useful lifespan of digital intellectual property is tricky. Some argue that <a href=\"https:\/\/www.cpajournal.com\/2022\/08\/01\/digital-assets-2\/\" target=\"_blank\" rel=\"noreferrer noopener\">since their lifespans are potentially unlimited, digital assets shouldn\u2019t be amortized<\/a>, but tested regularly to determine if they\u2019re still useful. If not, you can write them off as a loss.)<\/p>\n","protected":false},"excerpt":{"rendered":"<p>What&#8217;s an income statement in business? How does an income statement track revenue? The first document any business owner needs to understand is the income statement. This shows whether your company is profitable. According to Financial Intelligence by Karen Berman and Joe Knight, an income statement requires careful interpretation. Keep reading to learn what an income statement tells you about your business&#8217;s financial health.<\/p>\n","protected":false},"author":14,"featured_media":137119,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[45,81,31],"tags":[1676],"class_list":["post-136492","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-economics","category-money","tag-financial-intelligence","","tg-column-two"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.3 (Yoast SEO v24.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Income Statements in Business: How to Understand the Numbers - Shortform Books<\/title>\n<meta name=\"description\" content=\"An income statement is an essential financial document in business. 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