How to create and read an income statement for your business

Your business’s income statement is one of your most important financial reports. It shows how well your company is doing. Use it to spot areas for improvement—like where you could cut some costs or what underperforming products could be discontinued. Understanding the insights it offers could help you boost performance and serve as a road map for how to grow your business over time.

In this guide, we’ll break down the key metrics on an income statement. We’ll also show you how to read one and how you can create one for your company—step by step. 

What you’ll learn:

• An income statement shows whether your business is making a profit or taking a loss during a specific time frame. 

• Financial metrics included on an income statement include revenue, cost of goods sold (COGS), gross profit, expenses, gross income and net income.

• Creating an income statement can be done by gathering key financial information and running a few simple calculations.

An income statement, also known as a profit and loss (P&L) statement, is a key financial report that helps you understand how your business is actually performing. It shows your company’s revenue, costs and expenses—both operating and nonoperating—and tells you whether you’re making a profit or taking a loss over a specific period, like a month, quarter or year.

An income statement provides a visual of your business’s profitability. It can also highlight areas that might need improvement and show how your business stacks up against competitors in your industry.

Along with the income statement, your business also has other important financial reports to consider, such as the balance sheet and cash flow statement. And while each report plays a different role, together they help provide a clear picture of your company’s overall financial health. All are helpful when you’re developing your future business plan and making budgeting or investment decisions.

An income statement gives you a closer look at your business’s revenue and expenses, so you can see which areas are making a profit and where you might be losing money. It includes key metrics like revenue, COGS, gross profit, expenses, net income and operating income. Some even show you earnings before tax, interest, depreciation and amortization (EBITDA).

Here’s an in-depth look at each metric:

Revenue, also shown as sales on an income statement, is how much your company made from sales or services during a certain period. It’s the first number you’ll see at the top of the statement. From there, you subtract other costs from revenue to figure out your business’s net income.

COGS includes things like labor, parts, supplies and other materials you need to create and sell your products. But it doesn’t account for any indirect costs like marketing. COGS is subtracted from your revenue and plays a role in calculating net income, as well as gross profit and profit margin.

Gross profit is what’s left over after you subtract COGS from revenue. It shows how much money your business keeps from sales before factoring in other expenses like rent or salaries. This gives you a sense of how well you’re producing and pricing your products. A healthy gross profit means you’re managing production costs well and setting the right prices.

Business expenses are all the costs that come with running your company. Most of these fall under operating expenses, which cover the day-to-day costs of running your business—like rent, utilities, employee salaries, inventory, equipment and insurance. But there are also nonoperating expenses, which aren’t tied to your regular business activities, such as interest or one-time legal fees.

Operating income, also known as earnings before interest and taxes (EBIT), tells you how much profit your company is making from its core operations. To calculate it, you take your gross profit and subtract your operating expenses. It gives you a clear view of how efficiently your business is running and how well your core operations are performing.

Net income is your business’s bottom line. Think of it as what you have left after accounting for all expenses and taxes. In other words, it’s your total profit after everything is said and done. That’s why it shows up as the last line on the income statement. If it’s positive, you’ve made a profit. If it’s negative, it means your business spent more than it earned during that period.

EBITDA may also appear on a company’s income statement, but it’s not always included by default. It’s another important financial metric that helps you see how much profit your business is making and gives you a clearer view of how efficiently things are running. Unlike net income, EBITDA takes out interest, taxes, depreciation and amortization, making it useful for assessing your cash flow. 

You can calculate EBITDA by taking your net income and adding back in interest, taxes, depreciation and amortization. It often appears separately on the income statement, especially if the business wants to attract investors or get a clearer, more precise picture for internal analysis.

Here’s an example of what an income statement could look like for a boutique clothing retailer.

In the example for Sarah’s Closet LLC, the income statement shows the business owner how much her company made, what it cost to make that money and how much profit she ended up with. Taking a closer look at the income statement, here’s what all those figures tell us:

For the quarter ending December 31, 2024, the business brought in $500,000 in revenue—that’s what the company earned from sales before any costs are deducted. Then we subtract COGS, the direct cost of making or obtaining the products. After deducting COGS, the business owner is left with a gross profit of $300,000—this is the amount remaining after covering all the direct production costs.

Next, we have operating expenses. These are the normal costs involved with running the business, like rent, utilities, salaries and more. All those expenses add up to $140,000. 

Then we calculate the operating income. We do this by subtracting operating expenses from gross profit, which comes out to $160,000. That’s how much the company is really earning from its main business activities.

Finally, we subtract any interest expenses (for example, if the business owner has a loan) and taxes to arrive at a net income of $125,000. This is Sarah’s Closet’s actual profit, and it’s what the owner can use to reinvest in the business and plan for the future.

You can create an income statement for your business in just a few steps. Here are some tips to get you started:

1. Determine your reporting period. You can choose from monthly, quarterly or even annual reporting periods, whatever works best for your needs and your business goals. Monthly reports are great for spotting things early and adjusting your business plan as needed. On the other hand, quarterly or yearly reports can help you see the bigger picture and spot long-term trends.

2. Calculate your revenue. Once you’ve selected the reporting period, total up the revenue or sales your business made during that time. Just make sure you’re only including the revenue earned in that time frame to get an accurate picture. 

3. Find the COGS. Next, you’ll want to figure out what it costs to actually make or obtain your products. Include all costs like labor, raw materials, supplies and parts—anything that goes into actually creating your products. 

4. Subtract COGS to get gross profit. This is a simple step—just take the COGS you just calculated and subtract it from your revenue. That number tells you how much you’re bringing in before covering things like payroll, rent or utilities.

5. List and total your operating expenses. Now, list out all the costs that go into running your business day to day. These are things like salaries, office supplies, marketing, rent, utilities and insurance. If you have any equipment or long-term assets, remember to include depreciation and amortization, too. After that, subtract these costs from your gross profit to get your operating income or EBIT.

6. Subtract interest and taxes from operating income. Look at any loan interest you may have paid and any income taxes you owe. Then subtract those costs from your operating income. 

7. Review your net income. That’s it! You now have your business’s net income, which is your actual profit. If it’s positive, that’s a great sign. You’re making money. If it’s negative, it’s time to reassess your strategies. You might need to cut some expenses or consider raising your prices.

To avoid errors when putting together your income statement, try using accounting software and checklists—they can help you stay on top of how you’re categorizing your revenue and expenses. It’s also a good idea to reconcile your accounts every month. That way, you’re more likely to catch things like forgotten expenses or data entry mistakes.

Your income statement serves as your business’s financial snapshot over a set period of time. It lays out what you earned and whether you’re turning a profit after covering all your costs. Once you’ve got a clear picture of what you’re spending and how much your net income is, you can make better financial decisions for your company’s future. 

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