Accounting data, the key to accurate financial reporting, is typically captured and accumulated in the ordinary course of business by recording transactions in accounting software. Every financial transaction results in an accounting entry that is captured in the company’s general ledger, which contains detailed data such as the date, amount, expense type, and a description of each transaction. Examples of transactions that trigger a general ledger entry include supplies purchases, shipments or receipt of goods, sales of goods or services, employee wages and salaries, and many, many more. Amongst smaller businesses, one of the most popular accounting platforms is QuickBooks. Larger businesses utilize enterprise software such as Oracle NetSuite, SAP, or Sage.
The most commonly referenced reports are the three key financial statements: income statement, balance sheet, and statement of cash flows. The income statement, or profit and loss statement, represents the results of operations of a given entity over a period of time.
Financial reports are useful for making business and economic decisions. To fully have a handle on financial reporting, you need ...
An income statement provides the results for fixed period of time, which could be one month, quarter, or year. Note that the income statement title conveys the relevant period, one year in the example above.
The income left after all the operating expenses are deducted from the revenue is called the operating income or operating margin. This is the income the firm generates from its primary operation and usually excludes financing costs like interest paid or income realized from investments in securities. Unless, of course, the company you’re looking at is a bank, in which case interest is its primary source of revenue and interest expense represents the cost of goods sold or the cost of funds in that industry. Operating income should tell the reader what ongoing operations are producing and should exclude extraordinary items like the sale of a division.
The income statement is part of a company’s total reporting “package”1 and is an important way to measure the financial health of companies. Compared to the balance sheet - which measures financial condition including total assets, total liabilities, and the resulting net worth as of a point in time - the income statement provides insight as to how the company did over a period of time, typically a year. While the income statement is not a tax return, it does share some aspects of that statement. An income statement, like a tax return, provides information on sales (or revenues), expenses, and the net result for a period of time.