Income Statement
A financial statement showing revenue, expenses, and profit over a period—also called a profit and loss (P&L) statement.
Definition
An income statement—commonly called a profit and loss statement or P&L—summarizes your revenue and expenses over a period of time, ending with your net profit or loss. A typical small-business P&L starts with revenue, subtracts direct costs to get gross profit, then subtracts operating expenses like software, rent, and contractors to arrive at the bottom line.
Where the balance sheet is a snapshot of one date, the income statement tells the story of a stretch of time: a month, a quarter, or a year. Run a monthly P&L and you can see patterns—which months are strong, whether expenses are creeping up, how much of each dollar of revenue you actually keep. Your accounting software builds it from your invoices and recorded expenses.
Why It Matters
Your income statement is the report you'll use most. It answers the basic question—am I actually making money?—and breaks down where the money goes. A freelancer grossing $120,000 might discover that contractors, software, and fees consume $50,000 of it, which reframes every pricing decision. Comparing P&Ls across periods shows whether the business is growing or just busier.
It's also what others ask for. Tax preparers build your return from it, and lenders typically want one to two years of income statements before approving financing. Remember that on cash basis the P&L reflects money received, not invoices sent—a big month of collections can make a slow work month look deceptively good.
Examples
- 1
A freelancer's Q1 income statement shows $42,000 revenue, $11,000 expenses, and $31,000 net profit—the number that feeds quarterly tax estimates.
- 2
An agency's monthly P&L reveals contractor costs grew from 30% to 45% of revenue over a year, prompting a price increase.
- 3
A lender asks a studio for its last two annual income statements to verify the $150,000 in revenue claimed on a loan application.
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