Income statements are also known as Profit and Loss statements or P&Ls.  The Income Statement reflects revenue and all expenses incurred in the production of that revenue for a specific amount of time.  For example, the Twelve Month Period Ending December 31, 20XX or the One Month Period Ending May 31, 20XX.

• Service -   examples of services type businesses are doctors, accountants, architects, actuaries, lawyers etc


• Merchandising -  in essence this is a retail business like Target or Sears.  A merchandiser purchases goods from a manufacturing business and in turn sells them to the end user - a consumer like you or me.


•  Manufacturing -  as the name implies the manufacturing business makes the tangible products that are sold.

The following income statement shows the typical income statement presentation for a merchandising business.  

The basic income statement for a merchandising company consists of four different sections:Heading,  Revenue, Expenses that have a direct relationship to sales volume - Cost of Goods Sold and General & Administrative Expense.

ABC Retail Shop

Income Statement

For the
One Month Period Ending May 31, 20XX

Items to note:

• Gross Profit is what is left over after the Cost of Goods Sold (COGS)  is subtracted from Net Sales.


• Total Expense = COGS + General and Administrative Expense


• Net Income is your profit after all business expenses have been accounted for.

In order to effectively and efficiently run their business every business owner should have a basic knowledge of how an income statement is prepared.  The income statement is a valuable tool in profitability analysis, estimation of income taxes payable and to obtain funding for the business.

Reference Material for this article: Accounting for Non Financial Executives

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Accounting and Financial Fundamentals for Nonfinancial Executives