Income statement: What to include and how to build one
Learn what goes into an income statement and how to create one for your business.
Written by Ebony-Storm Halladay — Freelance accounting copywriter, 10 years. Read Ebony's full bio
Published Thursday 2 July 2026
Table of contents
Key takeaways
- An income statement, also called a profit and loss statement, shows your revenue, costs, and profit or loss over a specific period.
- Building one involves listing your revenue, subtracting cost of goods sold to find gross profit, then deducting operating expenses to arrive at net profit.
- Reviewing your income statement regularly helps you track profitability, plan ahead, and meet Companies House filing requirements.
- You can prepare an income statement in single-step or multi-step format, depending on how much detail you need.
What is an income statement?
An income statement is a financial report that summarises a business's revenue, expenses, and profit or loss over a specific period. Also called a profit and loss statement, it shows whether your business made or lost money by comparing total income against total costs.
You make an income statement by bringing together all of your business revenue sources and subtracting your total expenses, to get a final profit or loss figure for that period. The purpose of an income statement is to tell you whether your business has made money (profit) or lost money during a specific time.
Income statements are also called profit and loss statements; the names are interchangeable and mean the same thing. You might also see these statements referred to as income sheets. You can prepare an income statement for a range of periods, such as a month, quarter, or year.
Why income statements matter
An income statement gives you a clear view of how your business is performing financially. Here's why it's worth preparing one regularly.
First, it helps you track profitability. By comparing revenue against expenses over time, you can spot trends, identify where costs are rising, and see whether your business is moving in the right direction. This makes it easier to set realistic targets and adjust your approach.
Second, income statements support better business planning. When you know your profit margins, you can make more confident decisions about hiring, investing in new equipment, or expanding into new markets.
Third, lenders and investors typically ask for income statements when you apply for finance. A well-prepared statement shows that you understand your numbers and can manage cash flow, which strengthens your application.
Finally, if your business is registered as a limited company in the UK, you're required to file annual accounts with Companies House. An accurate income statement is a key part of that filing, and from April 2028, all small companies will be required to include a profit and loss account. Keeping your records up to date throughout the year makes this process much simpler.
What an income statement includes
An income statement includes several different types of income and expenditure.
- Revenue: this is the money you've made selling goods or services, or a combination of the 2, over a specific period
- Cost of goods sold (COGS) or cost of sales (COS): this is the money you've spent on creating your products or services. Product design, manufacturing, and packaging are all examples of cost of goods sold. Your direct costs will differ depending on your business type and what you sell; an accountant or bookkeeper can help you work this out
- Other income: this is the money you've earned outside of your usual business operations. This can include selling a piece of business equipment for more than you bought it for, earning savings interest, or dividends on an investment
- Operating expenses: this is all the money that goes into running your business, not including costs directly related to providing your goods or services. For example, office rent or marketing costs
A note on COGS and COS: COGS includes the direct costs of creating or procuring the products you sell. COS is slightly more expansive, and can include other costs like transaction fees and sales commission. You can choose either model to calculate costs; just be consistent in which one you apply. An accountant can help you work out which costs to include in COGS or COS.
How to build an income statement
Modern accounting software can prepare income statements for you in a few clicks, using records in the system. But it's also worth knowing how to build one manually, so you understand the financial information that goes into producing one.
Follow these steps to build an income statement from scratch.
1. Choose your accounting period
Decide on the accounting period you want to use for your income statement. This could be monthly, quarterly, or annual.
2. Calculate your total revenue
Gather your sales data for the period and work out your total revenue by adding all sales together.
3. Work out your cost of goods sold
Work out how much money you spent during this period on creating your products or services (COGS or COS). An accountant or bookkeeper can help you here.
4. Calculate your gross profit
Subtract your COGS or COS from your total revenue to get your gross profit.
5. Add any other income
Next, work out if you have any other income. This is money earned from activities outside of your usual business operations.
6. Gather your operating expenses
Gather expenses data for any other expenditure outside of the direct costs covered in step 3. These are your operating expenses: the money spent on running your business.
7. Calculate your net profit or loss
Add your revenue and other income together, then subtract your COGS or COS and operating expenses from this figure. This gives you the total profit or loss for the period.
Once you've completed these steps, you can summarise your results using 2 key formulas.
Gross profit = total revenue − COGS
Net profit = (total revenue + other income) − (COGS + operating expenses)
Income statement format and how to read it
An income statement follows a standard layout. Here's how it's typically structured.
A reporting period is included at the top of the document. Then, the first section is revenue, which shows how much the business has made selling goods or services. A business with multiple revenue streams will have multiple line items, 1 for each income source. At the bottom of this section is the total revenue.
The next section is cost of sales. This shows the direct costs involved with producing your products or services, like inventory or raw materials, design fees, or software used to create digital items. A business needs to calculate and define its own COGS or COS, since direct costs differ depending on what's sold.
Underneath the revenue and cost of sales section, you can find the gross profit or loss. This is calculated by subtracting COGS or COS from total revenue.
Next is the section for other income. This includes any money from sources outside the usual scope of business, for example, savings interest, dividends on investments, or capital gains from selling assets. Other income is listed and totalled at the bottom of this section.
The next section is operating expenses, which details any money spent on business running costs. For example, renting office space, office supplies and utilities, insurance, subscriptions, and payroll. Costs are listed across different operating expenses categories and totalled at the bottom of this section.
The final section is the net profit or loss. Revenue and other income are added together, and both COGS or COS and operating expenses are subtracted to give the total net profit or loss. A positive number means your business has made money, or profit, for that period. A negative number tells you your business has lost money for that specific period.
Income statements come in 2 main formats. A single-step income statement groups all revenue together and all expenses together, then subtracts total expenses from total revenue in 1 calculation. A multi-step income statement separates operating and non-operating activities, calculating gross profit and operating profit before arriving at net profit. Most small businesses find the single-step format simpler, while the multi-step format provides more detail for larger or more complex operations.
Income statement example
To see an income statement layout, check out this income statement example and template. You can view each section of an income statement and examples of what to include. The editable template lets you put your own figures in to calculate your profit or loss.
Get your income statement in a few clicks, with Xero
Preparing an income statement requires complete and accurate records. You need to gather income and expense transactions for a specific period and categorise them correctly, so you can work out your total profit or loss.
Modern accounting software can save you from complex calculations. Xero generates income statements for you, based on accounting records you keep in the system. Provided you use Xero for your bookkeeping and reconcile your accounts regularly, producing an income statement only takes a few clicks. This is helpful not just for understanding how much profit or loss you're making, but for filing sets of company accounts with Companies House, where an accurate income statement is important.
FAQs on income statements
Here are answers to common questions about income statements and how they work.
What are the 4 parts of an income statement?
An income statement has 4 main sections: revenue, cost of goods sold (COGS), other income, and operating expenses. Working out the figures for each of these sections lets you calculate your gross profit and net profit.
What is the income statement formula?
There are 2 key formulas. Gross profit equals total revenue minus COGS. Net profit equals total revenue plus other income, minus COGS and operating expenses.
What is the difference between a balance sheet and an income statement?
A balance sheet shows what you own and what you owe at a single point in time. An income statement shows your profitability over a specific period, such as a month or a year. Together, they give you a fuller picture of your financial position.
Do I include VAT in my income statement totals?
No. VAT isn't included on an income statement because it isn't business income or business expenditure. VAT money is owed to HMRC and isn't something you own.
How often should I prepare an income statement?
Preparing a monthly income statement helps you track performance over time, spot patterns, and plan ahead. Many small businesses find that monthly statements give them enough visibility to make informed decisions without waiting until year-end.
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