The income statement presents the revenues, expenses, and resulting profit or loss of a business. To prepare an income statement, follow these steps:
- Print trial balance. Go to the accounting software and print the "trial balance" standard report. This is a summary report that contains the ending balance of every account in the general ledger.
- Determine revenue amount. Aggregate all of the revenue line items on the trial balance and insert the result into the revenue line item in the income statement.
- Determine cost of goods sold amount. Aggregate all cost of goods sold line items on the trial balance and insert the result into the cost of goods sold line item in the income statement. This line is positioned directly below the revenue line item.
- Calculate gross margin. Subtract the cost of goods sold from the revenue figure to arrive at the gross margin. This is the gross amount earned on the sale of products and services.
- Determine operating expenses. Aggregate all of the expense line items below the cost of goods sold in the trial balance, and insert the result into the selling and administrative expenses line item in the income statement. This line is positioned directly below the gross margin line item.
- Calculate income. Subtract the selling and administrative expenses total from the gross margin to arrive at pre-tax income. Insert this calculation at the bottom of the income statement.
- Calculate income tax. Multiply the applicable tax rate by the pre-tax income number to arrive at the income tax expense. Enter this amount below the pre-tax income number, and also record it in the accounting records with a journal entry.
- Calculate net income. Subtract the income tax from the pre-tax income figure, and enter this amount on the last and final line of the income statement, as the net income figure.
- Prepare header. In the header of the document, identify it as an income statement, include the name of the business, and the date range covered by the income statement.
These steps only note the actions required to manually shift income statement information from the trial balance to a manually-prepared income statement. All accounting software has a standard income statement report that automatically presents the information noted in the preceding steps.