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What is an Income Statement, Elements, How to Create and Examples

What is an Income Statement, Elements, How to Create and Examples - Calculating profit and loss is an absolute activity carried out by companies or business actors. This activity makes it easy to find out whether the company's financial condition is profitable or experiencing a loss. The company will make an income statement at the end of each period or year end.
In addition to its main function as a means to check the company's financial health, this report can also be used as a basis when developing the company. If the income statement of a company always shows positive results, it will be able to attract investors to invest their capital.

So that you can understand this discussion in depth, please see the entire presentation below.

Get to know the Income Statement
Profit and loss statement or income statement is a bookkeeping record that contains all sources of income and also costs that are borne by the company. The foreign term for this report is profit and loss statement which has a function as a financial reference for the company.

Companies generally will appoint a certain party to compile this report because it does require an expert to do it. Profit and loss statements are always made at the end of the month or even the end of the year in order to get accurate data.

The party who has been appointed by the company to compile the report will work very carefully and thoroughly. Mistakes in writing numbers can certainly have a significant impact because it can affect the continuity of the company.

Elements of Compiling a Report
After understanding what an income statement is, you also have to know what elements you need when compiling it. The following is a series of elements of the profit and loss statement:

1. Cost of Goods Sold – COGS
The first step to compiling the books of profit and loss is to record the cost of goods sold or in short, HPP. The meaning of HPP itself is the total cost of the company's expenses when producing goods or services. These expenses include direct and indirect costs.

2. Sales or Net Income
Companies will receive net income from the sale of the products or services they offer. Well, to make a profit and loss record, the company must also attach this element.

If the company already has a record of sales revenue, then it can reduce it by total discounts, sales allowances, returns, etc. The result of the reduction shows the company's net income.

3. Gross Profit or Gross Margin
The next element is calculating gross margin or you can also call it gross profit. Companies usually use this element as a stepping stone in making decisions.

If the gross profit results do not show good prospects, the company can make policies such as lowering the HPP. However, if this decision is not right, it can take a policy by increasing the selling price.

4. Dividend
Preparing an income statement also requires dividends. Dividends are the result of net income which will then be given to shareholders. Each shareholder can get an amount that is not the same because it is in accordance with the size of the shares owned.

Also Read: Dividends: Definition, Types, How it Works and Tips

5. Operating Income
The company will not be able to compile an income statement if it does not know operating income. Calculating profit and loss must go through the process of subtracting gross profit from total operating costs.

6. Operating Expenses
Companies will incur operational costs to sell or market their products. These operational costs include administrative costs and selling costs.

Administrative costs are expenses to finance the overall management of the business. Meanwhile, selling costs are expenses that are only related to sales.

7. Retained Earnings
The definition of retained earnings is almost the same as dividends which are the company's net income. However, the company does not distribute the profits to shareholders.

The company will use the profits for investments that provide benefits to the company. Shareholders will benefit later with the accumulated value.

8. Other Income and Expenses
Making an income statement must also include all other income and expenses. Both usually do not have a direct relationship with the product sales process. These elements include taxes, profit from selling assets, interest expense, and income.

9. Net Profit
Net income is the last element in making profit and loss books. The way to calculate it is by adding up operating income and other income. The proceeds are then deducted by other costs.