Understanding your business’s financial health doesn’t have to be complicated. At the core of it all is a document you’ve probably seen before but might not fully understand. It’s called the income statement.
Also known as a profit and loss statement, this report is one of the three key financial statements used in business accounting. If you’ve ever wondered “What is an income statement?” or “How do I use this?”, this guide is for you.
We’ll walk through the income statement format, explain how it fits into your financial toolkit, and show you how to prepare an income statement that gives you clear insight into your performance.
An income statement is a financial document that summarises your business’s revenue, expenses, and profit (or loss) over a set period. This could be monthly, quarterly, or annually.
In its simplest form: Revenue minus Expenses equals Net Profit or Loss
Where the balance sheet shows what your business owns and owes, and the cash flow statement tracks actual money movement, the income statement focuses on your performance: how much you made, how much it cost to run your business, and what’s left over.
The purpose of an income statement is to show whether your business is profitable during a specific period. But it goes beyond just profit.
A well-maintained income statement helps you
Identify revenue trends
Track spending habits
Pinpoint rising costs or declining margins
Make decisions about pricing, hiring, or cutting back
It’s also an essential tool for accountants, lenders, investors, and government bodies assessing your business's viability and financial stability.
Whether you’re a startup founder, tradie, or experienced bookkeeper, understanding this statement puts you in control.
While income statements can vary depending on the business or accounting software you use, a basic income statement typically includes the following sections:
All the money your business earned during the reporting period. This could include service income, product sales, or other revenue sources like rental income or affiliate commissions.
These are the direct costs involved in producing the goods or delivering the services you sell, such as materials, packaging, or direct labour.
This is revenue minus COGS. It shows how efficiently your business generates profit from core activities before overheads are deducted.
Formula: Gross Profit = Revenue – COGS
Your overheads: rent, utilities, admin salaries, insurance, software, marketing—anything not directly tied to delivering your product or service.
This is earnings before interest and taxes. It gives you a picture of how profitable your operations are before any financing or one-off costs are considered.
This might include loan interest, asset sales, or tax payments. These are items not part of everyday operations.
The final figure is your true bottom line. This is the amount left over after all expenses are deducted.
Once you understand the format, the real power comes from knowing how to interpret the numbers.
Look at the top line (your total income) and compare it to previous periods. Are sales increasing? Is it consistent or seasonal?
If your gross profit margin is shrinking, your direct costs may be climbing. Maybe materials are more expensive or jobs are taking longer than expected.
If net profit is dropping but revenue is steady, expenses might be creeping up. Maybe you’ve taken on more software, staff, or subscriptions than necessary.
Income statements are most powerful when used to spot patterns—comparing month to month or year on year helps you predict and plan.
If you’re using software like Xero, QuickBooks or MYOB, generating your income statement is easy. But if you’re doing it manually, or just want to understand what your software is doing, here’s how to prepare an income statement step-by-step:
Decide if you’re analysing monthly, quarterly, or yearly figures. Monthly is ideal for regular reviews.
Include all earned income for that period, whether it’s cash received or invoiced, depending on your accounting method.
This gives you your gross profit. Use real figures for materials, direct wages, and contractor costs.
Add up overheads, fixed costs, and admin expenses.
Include interest, tax, or one-off income/expenses.
Gross Profit – Operating Expenses – Other Expenses = Net Profit
And there you have it, your basic income statement.
Let’s say you notice that profit is down this month despite consistent sales. Your income statement might show that your marketing spend doubled or supplier costs spiked. With this insight, you can:
This kind of clarity helps you stay profitable, not just busy.
Income statements shouldn’t just be something your accountant emails you at EOFY. They’re a practical tool to check in with your business, improve performance, and build a more sustainable operation.
And if chasing payments and manual reconciliation is one of the things clogging up your expense column, Pinch can help. By automating payments and syncing with your accounting platform, Pinch makes it easier to keep your income consistent and your statements clean.
Understanding the income statement format and learning how to prepare an income statement doesn’t need to be intimidating. Whether you're new to the numbers or have been running your books for years, this one report can give you powerful insights.
So next time you’re reviewing your finances, don’t just glance at the bottom line. Take a moment to read your income statement properly. It might be the most useful decision-making tool in your business.
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