Legal Definitions - income statement

An income statement is a financial report that summarizes a company's financial performance over a specific period, such as a quarter or a year. It essentially shows how much money a business made and how much it spent during that time, ultimately revealing whether it generated a profit or incurred a loss.

The income statement focuses on three core elements:

• Revenues: These are the total amounts a business expects to receive from selling its goods or services to customers. This includes sales made on credit, even if the cash hasn't been collected yet.
• Expenses: These represent the costs and resources a business used up or incurred to generate its revenues during the period. This covers everything from the cost of goods sold to salaries, rent, utilities, and even taxes.
• Net Income (or Net Loss): This is the final result. If total revenues exceed total expenses, the business has a net income (profit). If expenses are greater than revenues, the business has a net loss.

The fundamental relationship on an income statement can be expressed as: Revenues - Expenses = Net Income (or Net Loss).

Here are some examples to illustrate how an income statement works:

• Example 1: A Local Bakery
  • Imagine "The Daily Crumb," a small bakery. Over a month, their revenues would include all the money earned from selling bread, pastries, and coffee, whether customers paid with cash or credit card. Their expenses would cover the cost of flour, sugar, butter, employee wages, rent for the shop, electricity bills, and marketing flyers. At the end of the month, their income statement would subtract all these expenses from their total sales revenue. The resulting figure would be their net income, showing how profitable the bakery was for that month.
• Example 2: A Software Development Company
  • Consider "CodeCraft Solutions," a company that develops and sells subscription-based software. For a fiscal quarter, their revenues would primarily come from the subscription fees paid by their clients for using their software, as well as any fees for custom development projects. Their expenses would include the salaries of their software engineers and sales team, the cost of cloud server hosting, office rent, marketing campaigns for new software features, and administrative costs. The income statement would consolidate these figures, showing if CodeCraft Solutions achieved a net income (profit) or a net loss for that three-month period after all costs were accounted for.