What is an income statement?

Income statement (definition)

An income statement is a financial report that shows how much your business has spent and earned over a specified time. It also shows whether you’ve made a profit or a loss over that time.

An income statement might also be called a profit and loss statement or P&L. The statement can cover any period of time, although it’s most commonly prepared at the end of a month, a quarter, or a year.

  • What it tracks: Money earned vs money spent
  • What it tells you: If you had a profitable period or ran at a loss

An income statement summarizes all the activity recorded in your income and expenses accounts over the specified time. Income typically includes sales while expenses might cover things like payroll, advertising, rent and insurance. Your income statement will include all sales, including credit sales that your customers might not have paid yet. It will also include bills for expenses that you have incurred but not paid.

Your total profit or loss is what you’ve earned minus what you’ve spent. If this amount is positive, it’s called a net income. If it’s negative it’s called a net loss.

An income statement can also help you calculate profit margins, which show how good the business is at converting revenue into profits.

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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.