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An income statement — also known as a "statement of loss and expense," a "profit and loss statement" or a "P&L" — is one of the four types of major financial statements used in business. Along with the other reports known as balance sheets, cash flow statements and stockholder's equity statements, an income statement helps to assess the health and profitability of a business or even an individual's personal finances. As opposed to some of the other business evaluation tools, preparing an income statement requires that the accountant — or the individual responsible for preparing the report — identify a specific period of time such as a month, a quarter or a year on which to report. In general, the resulting document identifies gross business sales, costs of doing business and finally a net income. The best tips for preparing an income statement include choosing a time-frame on which to report; collecting all receipts, paperwork or other financial records; and determining if there will be any significant expenses or income to document in the footnotes of the resulting document.
Choosing a workable time-frame — which then becomes part of the document's header — to document is important in preparing an income statement, particularly if the statement will be the first of a new business or the first since an existing business has been newly acquired. Business experts recommend routinely preparing income statements on a regular basis and not just when applying for a business loan or considering other decisions that are income-based. Usually, the shorter the time frame chosen, the less difficult it is to complete. Further, regularly preparing an income statement helps to document the route of a business's growth and lends legitimacy to claims regarding profitability. These benefits may or may not seem important to a small business owner until additional funds are sought for business expansion or an offer to purchase the business is extended to the owner.
Preparing an income statement next involves documenting the business's revenue, which includes all the monies received for sales of goods or services. Depending upon the accountant's preference or the reasons for preparing an income statement, these sources of revenue may be specified as "cash,""credit cards" or other types of payment or provided in one undifferentiated amount. After calculating this amount of gross revenue, the account then turns to determining business expenses or the second step of preparing an income statement. As with the sources of business revenue, business expenses can be itemized or lumped together, although business experts recommended specifying unusual business expenses in the income statement's footnotes, if necessary. The resulting figure that results from adding these two sums represents a business's net revenue or loss.
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