The income statement, also known as the profit and loss is a document that shows the actual income, expenses and profit or loss that a company has generated over a period of time.

Examples of income could be sales, dividends and interest income, while examples of expenses could be the purchase of goods, personnel expenses, financial expenses, rents, insurance, depreciation and taxes.

The gain or loss would be the result of the difference between revenues and expenditures; no benefit when revenues are greater than expenses, and is lost when income is lower than expenditure.

As for the time period that includes an income statement, it is usually the duration of the fiscal year of a company, which tends to be one year, although it should be noted that the statement is a flexible document and in addition developed annual income statements, prepared statements are also monthly and quarterly results.

The income statement allows us to know what were the revenues, expenses and profit or loss that has created a company, analyze this information (for example, whether we are generating sufficient revenue, if we are spending too much, if the company is generating good profits if the company is spending more than you earn, etc.), and based on that analysis, to make decisions.

But it also allows us to compare a statement with other previous periods, to know what were the differences in results (no increases or decreases have been, and what percentage have been), and thus whether the company is meeting its objectives, in addition to projections based on trends that show variations.

Something to note is that the preparation of an income statement is based on the accrual principle, i.e. it shows the income and expenses when they occur, regardless of when they become effective recoveries or cash payments.

For example, if a company sells a product, the income statement records revenue from the sale at the time this is done, even when sales are not charged immediately, or if the company buys goods, the income statement records expenditures for the purchase at the time it occurs, even when half of the purchase is paid months later.

The basic structure of the income statement can be seen in the following example:

Model statement
Net Sales 160000
Cost of sales 120000
Gross profit 40000

Administrative expenses 5000
Sales Cats 4000
Depreciation 1000
Operating income 30000

Financial expenses 3000
Income before income taxes 27000

Taxation 8100
Net Income 18900

Consider the explanation of each of the accounts:
• The net sales are sales reported by the company after being granted refunds and rebates.
• The cost of sales are costs incurred in the acquisition of goods (in case of a trading company), the costs incurred in the production process (in case of an industrial company, in which case the account would be called cost production ), or costs incurred in providing services (in case of a service company).
• The gross profit also called contribution margin is the result of the difference between net sales and cost of sales.
• The administrative costs include expenses related to management activities, for example, labor costs (salaries, bonuses, insurance) managers, administrators and assistants, rent, materials and office supplies, electricity, water, and so on.
• The selling expenses include expenses related to marketing activities of products, for example, labor costs (salaries, bonuses, commissions) of the head of sales and vendors, advertising, sales tax, packaging, transportation, storage, etc…
• The depreciation is the decrease in value over time of buildings, machinery, equipment, furniture, etc.., available to the company.
• The operating profit also called earnings before interest and taxes is the result of the difference between gross profit and operating expenses (administrative expenses and selling expenses) and depreciation.
• The financial costs and interest expenses are related to the payment of interest on assumed debt.
• The profit before tax is the result of the difference between operating income and financial expenses.
• The tax also called profit tax or income tax is the tax the company must pay taxes that apply to profits.
• The net profit also called net income or net income is the gain or loss realized by the company, is derived from the difference between income before taxes and taxes.

Finally, as an example of the state analysis of results, we could say that the company can be considered cost effective because it generates profit (net income, earnings or profits), which could mean that we are meeting the objectives, or we could take decision to invest in it.

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