An income statement is a financial statement that reports an entity’s revenues and expenses over a period, showing whether the entity earned a profit or incurred a loss.
The core calculation is straightforward: revenue minus expenses equals net income. Revenue represents what the entity earned from selling goods or services. Expenses represent the costs it incurred to generate that revenue — salaries, rent, materials, interest, taxes, and so on. When revenue exceeds expenses, the entity reports net income (a profit). When expenses exceed revenue, the entity reports a net loss.
Net income doesn’t stay on the income statement. At the end of each period, it flows into equity on the balance sheet, increasing retained earnings if positive or decreasing them if negative. This link between the two statements is why accountants can’t prepare one without the other. It’s also worth noting that the income statement records revenue when it’s earned and expenses when they’re incurred, regardless of when cash changes hands. An entity can report strong profits on its income statement while its actual cash position deteriorates — a situation the cash flow statement is designed to reveal.
Related terms
- Account — an individual category used to classify revenues and expenses.
- Financial statements — the full set of formal reports, of which the income statement is one.
- Balance sheet — the statement that absorbs net income into equity at period end.