Preparing an income statement, also known as a profit and loss statement, for a company that has both accounts payable and accounts receivable involves summarizing the company’s revenues and expenses to determine its net income or net loss over a specific period. Here’s a step-by-step guide on how to prepare an income statement:
Gather Financial Information:
Collect all relevant financial information for the specified period, including sales or revenue, cost of goods sold, operating expenses, interest expenses, and taxes.
Start with the company’s total revenue. This includes sales of products or services. If the company extends credit to customers, consider both cash sales and sales made on credit (accounts receivable).
Determine Cost of Goods Sold (COGS):
If the company sells products, calculate the cost of producing or purchasing the goods that were sold during the period. This includes direct costs like materials, labor, and manufacturing expenses. Subtract COGS from revenue to calculate gross profit.
Calculate Gross Profit:
Gross profit is the difference between total revenue and cost of goods sold. This reflects the profitability of the core business operations before considering operating expenses.
List Operating Expenses:
Include all operating expenses such as salaries, rent, utilities, marketing expenses, and administrative costs. These are the costs incurred to run the business day-to-day.
Calculate Operating Income:
Subtract the total operating expenses from the gross profit to calculate operating income. Operating income reflects the profitability of the core business operations after considering operating expenses.
Include Non-Operating Items:
If applicable, include non-operating items such as interest income, interest expenses, gains or losses from the sale of assets, and other income or expenses not directly related to the core business operations.
Calculate Net Income Before Taxes:
Add or subtract non-operating items from the operating income to arrive at net income before taxes.
Account for Taxes:
Deduct income taxes from the net income before taxes to calculate net income after taxes. This is the final profit or loss figure for the specified period.
Present the information in a clear and organized format. Typically, an income statement is structured with revenue at the top, followed by the various expense categories, and ending with net income or net loss.
Remember that accounts payable and accounts receivable impact cash flow but are not directly included in the income statement. They affect the timing of when revenues and expenses are recognized. While accounts receivable represent revenue earned but not yet collected, accounts payable represent expenses incurred but not yet paid.
When preparing the income statement, it’s important to adhere to generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS) to ensure accuracy and consistency in financial reporting. If you’re not familiar with accounting principles, it’s recommended to seek the assistance of a qualified accountant or financial professional.