An income statement is the financial statement that reports how much revenue an organisation earned over a period, what expenses it incurred to earn it, and the resulting profit or loss. It is also called the profit and loss account (P&L), the statement of operations or, under IFRS, the statement of profit or loss. Companies publish one for every quarter or year they report on.
It is one of the core financial statements, alongside the balance sheet and the statement of cash flows. Where the balance sheet is a snapshot on one date, the income statement covers a span of time. It is prepared on an accruals basis, so it records revenue when earned and costs when incurred, not when cash moves.
Income statement in plain terms
Picture a market stall at the end of a busy month. The owner adds up everything customers agreed to pay, then subtracts the cost of the fruit sold, the pitch rent, the van fuel and the helper's wages. What is left is the month's profit. That simple list, top to bottom, is an income statement.
The useful part is the order. Sales sit at the top, the direct cost of the goods comes next, then the running costs of the business, then interest and tax. Reading down the page shows where the money went at each stage and how much was left for the owner at the bottom line.
Layout and key subtotals
Most companies use a multi-step layout that shows several subtotals on the way down:
- Revenue, recognised under IFRS 15 or ASC 606 (see revenue recognition).
- Cost of sales, giving gross profit.
- Operating expenses such as selling, administrative and research costs, plus depreciation and amortization, giving operating profit.
- Finance income and finance costs, mainly interest, giving profit before tax.
- Income tax expense, giving net profit, also called net income.
A single-step layout groups all revenues and all expenses and subtracts once; it is simpler but shows less. In both, the bottom line is:
where revenue is all income earned in the period and expenses are all costs charged to it, including interest and tax.
A worked example
A software company has the following year (figures in thousands):
| Line | Amount |
|---|---|
| Revenue | 1,000 |
| Cost of sales | (400) |
| Gross profit | 600 |
| Operating expenses (incl. depreciation 50) | (350) |
| Operating profit | 250 |
| Interest expense | (50) |
| Profit before tax | 200 |
| Income tax at 25% | (50) |
| Net income | 150 |
The gross margin is 600 ÷ 1,000 = 60%, and the net margin is 150 ÷ 1,000 = 15%. Adding back depreciation of 50 to operating profit gives an EBITDA of 300. If the company has 100,000 shares, earnings per share are 150,000 ÷ 100,000 = 1.50.
IFRS, US GAAP and the IFRS 18 change
Under IAS 1, IFRS reporters have had wide freedom over subtotals, which made "operating profit" mean different things at different companies. IFRS 18, issued by the IASB in April 2024 and effective for annual periods beginning on or after 1 January 2027, changes this. Income and expenses must be sorted into operating, investing and financing categories (plus income taxes and discontinued operations), and two subtotals become mandatory: operating profit, and profit before financing and income taxes. Companies that quote their own "adjusted" figures, known as management-defined performance measures, must reconcile them in the notes.
US GAAP does not prescribe a single format, but the SEC's Regulation S-X sets line items for public companies. In November 2024 the FASB also issued a standard (ASU 2024-03) requiring more breakdown of expense lines in the notes, effective for public companies for annual periods beginning after 15 December 2026.
Reading an income statement
Analysts use the income statement to judge profitability and its quality. Common checks include:
- Margin trends. Rising revenue with falling gross margin may signal price pressure or higher input costs.
- Cost structure. The split between fixed expenses and variable expenses shows how sensitive profit is to sales volume.
- One-off items. Restructuring charges or asset sales can flatter or depress a single year.
- Valuation. Net income feeds the price-to-earnings ratio (P/E) used in share valuation.
- Cash backing. Profit that does not turn into cash flow over time is a warning sign, so analysts compare the two statements.
Because the income statement relies on accrual accounting, judgements about timing (when to recognise a sale, how fast to depreciate an asset, how much to provide for bad debts) can move profit between periods. That is why auditors focus on these areas and why readers check the notes before relying on a headline figure.