The income statement: definition, usefulness and examples to help you become an expert

What is an income statement in accounting?

If you're a merchant, you're usually required to draw up annual accounts at the end of each financial year. And the income statement is one of the documents you'll need to provide.

But what exactly does it consist of? What is its purpose, and how does it differ from the balance sheet ?

Find out for yourself!

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What is the income statement? Definition

The income statement, or income statement, is part of the annual financial statements, along with two other financial statements:

• the balance sheet,

• and the notes to the financial statements.

The income statement represents, for a given accounting period:

• income, i.e. revenues or sales,
• and expenses, i.e. the various costs incurred by the company.

If revenues exceed expenses, the company is profitable.

What is the purpose of an income statement?

By showing the company's net income, the income statement reveals its profit or loss for the financial year.

As a result, this document is useful for :

• the tax authorities 👉 the annual financial statements serve as the basis for calculating the company's tax liability.
  
• company directors 👉 by analyzing the breakdown of income and expenses, they are in a position to make better strategic decisions.
  
• investors or purchasers 👉 by studying operating income, they can assess a company's financial health.

What is a projected income statement?

There are also projected income statements. These are of particular interest to banks and credit institutions, especially when they consult a business plan.

They are based on forecasts of :

• sales,
• exceptional items
• financial income, etc.

The projected income statement is an invaluable tool for forecasting the company's future profitability.

What's the difference between the balance sheet and the income statement?

The balance sheet is another mandatory accounting document, showing the company's assets and liabilities and changes in these since the company was founded.

Unlike the balance sheet, the income statement focuses on the year's results.

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Example of an income statement table

In this example of a detailed income statement, we distinguish between the three main parts that make it up:

• operating income,

• financial result,
• exceptional items.

economie.gouv.fr

To go further, follow the steps and advice in our dedicated article on how to read and draw up an income statement!