If you need to know how to make an income statement, the process is straightforward: list your revenue, subtract the direct costs of producing that revenue, then subtract operating expenses to find profit or loss. An income statement shows whether a business earned money during a specific period, such as a month, quarter, or year.
It is one of the most important financial reports for understanding business performance. Whether you are a small business owner, freelancer, or student learning accounting, this guide breaks the process into simple steps, with examples and practical tips.
How To Make An Income Statement
To make an income statement, choose a time period, record all revenue earned during that period, subtract cost of goods sold to find gross profit, subtract operating expenses to find operating income, and then account for interest, taxes, and other items to arrive at net income. The result shows profit if positive or a loss if negative.
What an income statement shows
An income statement, sometimes called a profit and loss statement or P&L, summarizes a business’s financial performance over a set period. It does not show cash in the bank at a single moment; that is the job of the balance sheet and cash flow statement.
In simple terms, the income statement answers three questions:
- How much money came in?
- How much did it cost to earn that money?
- What profit or loss remained after expenses?
Common terms you will see
- Revenue: money earned from selling goods or services before expenses.
- Cost of goods sold (COGS): direct costs tied to producing or delivering what you sold.
- Gross profit: revenue minus COGS.
- Operating expenses: regular business costs such as rent, payroll, software, marketing, and office supplies.
- Operating income: gross profit minus operating expenses.
- Net income: the final profit after interest, taxes, and other non-operating items.
Step-by-step: how to make an income statement
1. Choose the reporting period
Start by deciding the time period the statement will cover. Common choices are monthly, quarterly, or yearly. The period should be clear at the top of the report, such as “For the Month Ended March 31, 2026.”
Using a consistent period helps you compare performance over time. For example, monthly statements can help a small business spot seasonal trends or rising costs early.
2. Gather your revenue records
List all income earned during the period. This may include product sales, service fees, consulting income, subscription revenue, or other business income. If you sell on credit, revenue is usually recorded when earned, not necessarily when cash is received, depending on your accounting method.
Be careful not to mix gross revenue with net revenue unless you clearly label it. Gross revenue is the full amount billed or collected before deductions. Net revenue may subtract returns, discounts, or allowances.
3. Calculate cost of goods sold
Next, determine the direct costs associated with the revenue. These costs usually include materials, direct labor, packaging, and shipping tied to the sale. If you are a service business, COGS may be smaller or structured differently, but direct delivery costs still matter.
A basic formula is:
COGS = Beginning inventory + Purchases during the period – Ending inventory
If you do not carry inventory, you may instead total the direct costs related to the work completed during the period.
4. Find gross profit
Gross profit shows how much is left after direct production costs are removed.
Formula: Revenue – COGS = Gross Profit
Example: If revenue is $50,000 and COGS is $20,000, gross profit is $30,000. This figure helps you see whether the core business model is working before overhead costs are considered.
5. List operating expenses
Operating expenses are the costs of running the business that are not directly tied to one product or service. Common examples include:
- Rent or office space
- Salaries and wages for administrative staff
- Marketing and advertising
- Insurance
- Utilities
- Software subscriptions
- Professional fees, such as bookkeeping or legal support
These expenses should usually be grouped in a clear, consistent way so the report is easy to read and compare across periods.
6. Calculate operating income
Operating income shows the profit from normal business operations before interest and taxes.
Formula: Gross Profit – Operating Expenses = Operating Income
Example: If gross profit is $30,000 and operating expenses are $18,000, operating income is $12,000. This number helps you understand whether the business is profitable from its main activities.
7. Add non-operating items
Some businesses have income or expenses that are not part of everyday operations. These may include interest income, interest expense, gains or losses from asset sales, or other one-time items. Include them carefully and label them clearly.
This step matters because two businesses with the same operating income may end with different net income if one has much higher debt costs or unusual gains and losses.
8. Subtract taxes to find net income
After non-operating items, subtract income taxes if applicable. Tax treatment depends on the business structure, jurisdiction, and local rules, so the exact amount can vary. If you are preparing an illustrative statement, note that taxes are estimated.
Formula: Operating Income +/– Non-Operating Items – Taxes = Net Income
Net income is the bottom line. If the result is positive, the business made a profit. If it is negative, the business had a loss for the period.
Simple example of an income statement
Here is a basic example for one month. The numbers are illustrative only.
- Revenue: $40,000
- COGS: $16,000
- Gross profit: $24,000
- Operating expenses: $14,000
- Operating income: $10,000
- Interest expense: $1,000
- Taxes: $2,000
- Net income: $7,000
In this example, the business earned a $7,000 profit for the month. If expenses had been higher than revenue, the statement would show a loss instead.
Income statement format you can follow
You can build a simple income statement in a spreadsheet or accounting software using this layout:
- Revenue
- Less: Cost of goods sold
- Gross profit
- Less: Operating expenses
- Operating income
- Plus or minus: Non-operating items
- Less: Taxes
- Net income
For clarity, keep the same order each period. That makes it easier to compare results and identify trends.
Helpful tips for making an accurate income statement
Keep revenue and expenses organized
Use receipts, invoices, bank statements, and accounting records to support each line item. Good recordkeeping reduces errors and makes tax preparation easier.
Separate direct costs from overhead
One of the most common mistakes is mixing COGS with operating expenses. Direct costs belong in COGS, while general business costs belong in operating expenses. Keeping them separate gives a clearer picture of profit margins.
Use the same accounting method consistently
Businesses generally use either cash basis or accrual basis accounting, depending on their size, structure, and local rules. Under cash basis, revenue and expenses are recorded when cash changes hands. Under accrual basis, they are recorded when earned or incurred. The method you use affects the numbers, so stay consistent.
Watch for one-time items
Large unusual expenses or gains can distort the picture of normal performance. If possible, label them separately so readers can tell what is recurring and what is not.
Review margins, not just profit
A business can show profit and still have weak margins. Gross margin and operating margin help you see how efficiently the business turns sales into profit.
Gross margin formula: Gross Profit ÷ Revenue
Operating margin formula: Operating Income ÷ Revenue
For example, if gross profit is $30,000 and revenue is $50,000, gross margin is 60%. That means 60 cents of every sales dollar remains after direct costs, before operating expenses.
Common mistakes to avoid
- Using cash received instead of revenue earned without noting the accounting method
- Forgetting refunds, discounts, or returns
- Putting loan principal payments on the income statement instead of the balance sheet or cash flow statement
- Mixing personal and business expenses
- Leaving out taxes or interest when they should be included
- Changing categories from period to period, which makes comparisons harder
When to use an income statement
An income statement is useful any time you want to measure performance over time. Small businesses use it to monitor profitability, lenders may review it to assess financial health, and investors may use it to evaluate earnings trends. Freelancers and sole proprietors can also use it to understand whether pricing and expenses are sustainable.
It is especially helpful when paired with a budget. A budget shows what you expect to earn and spend, while the income statement shows what actually happened.
Final takeaway
To make an income statement, list revenue, subtract direct costs, subtract operating expenses, and then account for interest, taxes, and other items to reach net income. Keep the categories consistent, use the same reporting period each time, and separate recurring business activity from one-time items. If you want to go further, you may also find it helpful to read about how to prepare an income statement and how to calculate operating income.