An income statement, also known as the Profit and Loss statement, is a financial statement that details a firm's revenue earned over a specific period, its costs, the resulting profit, and how it has been distributed (appropriated).
The Income Statement equation is:
Revenue – Expenses = Income
Revenue: An income statement prepared using GAAP generally shows revenue when it accrues, not at the time of cash collection. The general rule recognizes revenue when the earnings process is virtually complete, and the transaction price can be reliably determined.
Expenses: Expenses shown on the income statement are based on the matching principle. The basic idea is to determine the revenue and then match those revenues with the costs associated with producing them.
An income statement starts with revenue and expenses from core business activities, followed by non-operating costs, taxes, and ultimately, the net income (bottom line).
