How Detailed Should an Income Statement be for a Small Business?
Let’s first start with what is an income statement? It is the profit and loss of the business in a specific period. The total revenue for the business, minus the expenses for the period. It shows whether the business operated at a profit or loss.
Most Income Statements have the following accounts:
- Income Statements have a Revenue Account minus the Cost of Good Sold accounts, giving you the Gross Profit.
- Then you take out the Operating expenses, which usually include Selling Expenses, General and Administrative Expenses, Depreciation and Amortization Expenses. This gives you the Operating Income.
- Finally, take out any Interest Expenses and Income Tax Expenses and you would arrive at the Net Income.
Most small business owners would like to see more accounts than the ones outlined above. They want separate line items for accounts that are material to their bottom line. But trying to figure out the number of accounts on an income statement can be challenging.
In creating an income statement that is just right for your business, one would need to consider a couple of things. The industry in which the business operates, the accounts that are material to the business and who the reports are for.
One should also consider what information your management would need to make informed decisions on the future of the business. Your team should be able to look at the income statement and see what is working and what is not working. Once an account is identified as being an area of concern, management can dive into the details of the account and assess the expenses individually, rather than having each vendor as its own account.
When an income statement is too detailed, meaning too many accounts, the information can get lost in a long report where the reader gets overwhelmed by all the information. Also, the employee who is responsible for coding is spending too much time looking for the correct account to code the expense transaction to, which oftentimes ends up being immaterial to the business.
The opposite scenario is where all the revenue and expenses are lumped together in just a few accounts. While this might be a great snapshot of your business, and it does show you if the business is profitable or not, this report probably wouldn’t benefit management in making decisions about expense accounts. The reports should be helping them see trends and fluctuations in your business over a period of time to make informed decisions.
Remember, with the income statement less is more. If you need more information about certain accounts you can always dive into the details of the account. If you would like more help with setting up an Income Statement for your business, please reach out to us!