The Income Statement (also known as the profit and loss) is comprised of the following main accounts:

Revenue/Sales

Sales are recorded when the company ships a product or completes the service (orders are not sales—orders only increase the “backlog”). In industries with a lot or discounts and/or returns, such as retail, the company will provide an estimated return or discount number to subtract from sales. This number is based on historical results or industry standards. In such cases, the Income Statement will show revenue minus (discounts and returns) for a total called net sales.

Cost of Goods Sold (also known as Cost of Sales and abbreviated COG's or COS's)

 Cost of Goods Sold (COG’s) refers to the direct costs attributable to the production of the goods sold by a company. This usually includes materials, labor, and direct production costs. It excludes indirect expenses such as distribution costs and sales force costs.

Gross Profit or Gross Income

Gross Profit is a key performance indicator and is often listed as a separate account on the Income Statement. It is calculated by taking the Revenue (net sales) minus the Cost of Goods and Services Sold (COG’s). This is an important number, as the difference (Sales-COG’s) represents the amount of money available to cover other operating expenses, shareholders and reinvestment.

Gross Profit Margin (also called profit margin) is calculated by Gross Profit/Sales expressed as a ratio. (Multiply answer by 100 to turn it into a ratio)

Selling General and administration (SG&A)

Also known as Operating Expense, this refers to the essential things that a company must pay for in order to maintain business operations. These are commonly referred to as the overhead expenses such as, rent, insurance, marketing.

Net Profit, Net Income

Often referred to as the bottom line. Net profit is calculated by subtracting a company’s total expenses (Cost of Goods and Selling General and Administrative) from Total Revenue, thus showing what the company has earned (or lost) in a given period of time (usually one year).

At the end of the year, either calendar or fiscal depending on the company's structure, the Income Statement for the year is complete, the net income transfers to retained earnings on the balance sheet and the next year begins with all accounts on the Income Statement at zero.

For a more thorough review of Financial Statements, “Simply Put Summary Financial Statement Reference Manual” can be purchased at www.BusinessSimplyPut.com