What is an income statement?
Learn what an income statement is, what it shows, and how to read one to track your business profit.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- An income statement shows your revenue, expenses, and profit or loss over a set period. It’s also called a profit and loss statement, or P&L.
- It works from the top down: revenue minus your costs and expenses leaves you with net income or net loss.
- You can prepare it in a single-step or multi-step format, depending on how much detail you want.
- It helps you track profitability, make decisions, and show lenders or investors how your business is performing.
Income statement definition
An income statement is a financial report that shows your business’s revenue, expenses, and profit or loss over a set period, such as a month, quarter, or year. It’s also called a profit and loss statement, or P&L.
It answers a simple question: did your business make money or lose money over that time? You read it from the top down, starting with what you earned and ending with what you kept.
What an income statement includes
An income statement is built from a few standard line items that flow from your total earnings down to your final profit. Here’s what you’ll usually find, in order:
- Revenue or sales: the total money your business earns from selling products or services
- Cost of goods sold: the direct costs of producing the goods or services you sold
- Gross profit: revenue minus cost of goods sold
- Operating expenses: your day-to-day running costs, like rent, wages, and marketing
- Operating income: gross profit minus operating expenses
- Net income or net loss: what’s left after you subtract all expenses and taxes from revenue
Income statement formats: single-step vs multi-step
You can lay out an income statement in two common ways, and the right one depends on how much detail you need. Both arrive at the same net income or net loss.
A single-step format groups all your revenue together and all your expenses together, then subtracts one from the other in a single calculation. It’s quick to prepare and easy to read, which suits smaller or simpler businesses.
A multi-step format separates operating items from non-operating ones and shows subtotals like gross profit and operating income along the way. It gives you a clearer view of where your profit comes from. You can see how the layout works in this guide to the multi-step income statement.
How to read an income statement
Reading an income statement is mostly subtraction. Start at the top with revenue, take away your costs and expenses, and the bottom line shows your net income or net loss.
Along the way, the subtotals tell their own story. Gross profit shows how much you keep after direct production costs, and operating income shows what’s left after your running costs.
You can also use the numbers to work out profit margins, which show profit as a percentage of revenue. Comparing margins over time helps you spot whether your business is getting more or less profitable. A free income statement template gives you a ready-made structure to plug your own figures into.
Income statement vs other financial statements
An income statement is one of three core financial statements, and each one answers a different question. Together they give you a full picture of your business’s finances.
A balance sheet shows what your business owns and owes at a single point in time, rather than over a period. It focuses on your assets and liabilities, while the income statement focuses on profit.
A cash flow statement tracks the actual cash moving in and out of your business. Your income statement can show a profit even when cash is tight, which is why you read the two side by side.
How small businesses use an income statement
For a small business, an income statement is a practical tool, not just a report for tax time. It helps you see whether the work you’re doing actually turns a profit.
You can use it to make everyday decisions, like whether to cut a cost, raise a price, or invest in growth. Tracking net income across periods shows you the trend in your profitability.
Lenders and investors also rely on it to judge how your business is performing before they back you. Reading it alongside your other reports gives the fullest view, and this guide on how to read financial statements walks you through it.
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FAQs on income statements
Here are answers to frequently asked questions about income statements.
What’s the difference between an income statement and a balance sheet?
An income statement shows your revenue, expenses, and profit over a period of time. A balance sheet shows what you own and owe at a single point in time.
Is an income statement the same as a profit and loss statement?
Yes, an income statement and a profit and loss statement are the same report. Profit and loss statement, or P&L, is just another name for it.
How often should you prepare an income statement?
Many small businesses prepare one monthly or quarterly to track profitability, plus a yearly one. How often you do it depends on how closely you want to watch your numbers.
Is an income statement the same as a cash flow statement?
No, they measure different things. An income statement shows profit over a period, while a cash flow statement tracks the actual cash moving in and out of your business.
Related terms
Learn more about income statements
Handy resources
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Free income statement template
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Financial reporting
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.