The income statement is the financial statement that sets a period's income against the expenses incurred to earn it, arriving at a profit or a loss. It is also called the profit and loss account, the P&L, or the statement of comprehensive income.
What it means
Where the balance sheet is a snapshot at a single date, the income statement covers a span of time - a month, a quarter or a year. It starts with revenue, subtracts the cost of sales and operating expenses to reach an operating profit, then accounts for interest and tax to reach the net profit or loss. That bottom-line result is what flows into retained earnings on the balance sheet.
Where it fits in
Salaries and wages, employer contributions and other employment costs are operating expenses on the income statement, frequently the single biggest line for a service business. Each pay run's payroll journal posts this cost, so the income statement only reflects payroll correctly when every run has been journalised for the period.
Key rules
- Covers a period, not a point in time.
- Runs from revenue down through cost of sales and expenses to net profit or loss.
- Employment cost is an operating expense, often the largest one.
- The net result carries into equity (retained earnings) on the balance sheet.
