Every business must keep track of income and expenses, profit and loss, not just for tax purposes but also for evaluating productivity in keeping with the business plan. An income statement should serve as a guide to a business’ cash flow management. It should be included in the financial plan section of the overall business plan.

Many businesses require presenting clients or board members with documentation of financial activity, so it is even more crucial to keep regular and up-to-date records of income and expenses. When including sales of tangible products and stock, tracking expenses and purchases also is important. Typical businesses, however, all should track basic income and expenses at the very minimum.

Basically, an income statement, also called a profit and loss or P&L, should answer the question, “How is my business doing?” and compare all revenue sources versus outgoing expenses for a period of time. For example, a business might choose to create an income statement format for a quarterly period. When a business is first starting out, it might be a good idea to re-evaluate income every quarter. Monthly might be overkill and present an inaccurate picture or give too short a period of time to show any growth or issues but could be a good idea for the start-up business to become accustomed to the process. Some businesses provide a new income statement on an annual basis.

Income statements typically include: sales, cost of goods sold, gross profit, operating expenses, depreciation and net sales after taxes.

The items listed in the sales column are gross monies made in the sale of a product or agreement for a service provided, minus discounts and returns or cancellations, which creates the net sale. Gross profit is sales less the cost of goods sold, which then indicates the actual profit (net, profit margin) of the sale. Cost of goods sold is the total cost that goes into the production of a product or service, including materials, equipment, consultations or vendor costs, and employees. For a service business, “fees paid” would be the alternate category. Commissions paid to staff, advertising, membership fees, rent, utilities, general office supplies and other similar expenses make up operating expenses. Depreciation is when a piece of equipment, for example, a car or a copier, is purchased and its expense is spread out over a period of time. The IRS requires certain depreciation standards to qualify the equipment in question on tax forms. Depreciation is considered a non-cash expense. Net sales after taxes equals the total revenue.

Typically a business will pay its sales and revenue tax quarterly, though some prefer to do so once annually. It is a good idea to confer with an accountant about the best option to prevent any year-end tax payment issues.

A common and most typical income statement format is to list the business name and income statement period, as well as income at the top, with expenses at the bottom, with a line separating both sections. The format is not as critical as clarity and inclusion of all the information. Consistency is also a key consideration. Creating a format that is used every time helps a business build and maintain professionalism and decreases confusion. The degree to which each line item is broken down and listed and the categories for both income and expenses depend on the type of business and the detail the owner(s) wish to document.

Having an up-to-date income statement encourages potential investors, presents the business in a positive and professional light, allows for efficient and on-time tax payment, and allows a business to evaluate and project future income and plan expenses accordingly.