The time period specified is adjustable but typically the report is prepared on a monthly, quarterly and annual basis. Additionally, many businesses may choose to compare the same time period over a few years to identify trends or weak spots. For example, it might be helpful to know what the March profitability is for 2017, 2018 and 2019. The Income statement can then be compared from year to year. 

Because the Income Statment reflects a specified time period, businesses will likely want to compare the 2020 Covid season to previous years to get a better idea of the impact to the business. Although crude, the Income Statement will provide insight to the business about how operations have been and/or continue to be impacted. 

So how does the Income Statement help businesses understand their financial position? To understand this, it is important to know what the Income Statement does not do. First, the Income Statement does not show how much money is in the bank. Second, it does not indicate how much debt is owed. Finally, it does not show the value of assets such as equipment or vehicles. The Income Statement shows profitability.

Assuming the report covers an accrual basis (when transactions take place, not necessarily when money is paid or received), the Income Statement shows all revenues (sales) from normal operations, ancillary operations, and gains from sales of assets (equipment). The revenue is followed by the expenses (costs) incurred from normal operations, ancillary operations and losses on sales of assets (selling equipment for less than book value). 

When the total expenses and losses are subtracted from total revenues and gains, the result is the net income. This is the “Bottom Line” for a business. If the number is positive, the business was profitable during the specified period. If the number is negative, the business lost money during the specified period. 

This is where the term, “Black Friday” comes from. In accounting, when the business is not profitable, it is, “in the red.” This is how we easily identify areas of concern on the report. By using red number to indicate losses or expenses, it is easier to spot them. Since most retail shops spend most of the year loosing money due to the high cost of business, Black Friday is when all of the businesses that run “in the red,” finally make money and become profitable. 

To summarize, the Income Statement is a fairly simple report that looks at the profitability of the business over a specified time period. It doesn’t show the whole financial picture, but it is a necessary indicator for business decisions. Don’t forget that a report is only as good as the data. If you are not entering your transactions into your bookkeeping system properly, then your reports will be wrong. If the reports are wrong, you cannot use the data to make informed decisions. 

Always make sure you are entering your information correctly, or find a professional to outsource your bookkeeping so you can have peace of mind about your numbers and make better financial decisions.