In plain English
Also called the profit and loss or P&L. It shows performance over time, unlike the balance sheet, which is a snapshot.
Compare periods to see trends.
Why it matters
A lender reading your loan application will usually ask for a year-to-date profit and loss before anything else. If personal purchases, loan payments or sales tax are mixed into it, the report understates or overstates what the business earns, and the lender draws the wrong conclusion about whether you can repay.
Your tax preparer also starts from this report. A P&L that has never been reviewed line by line tends to produce a long list of questions at filing time and a higher bill for answering them.
Worked example
Revenue $200,000 - COGS $120,000 - expenses $56,000 = net income $24,000.
How to handle it
- Run the profit and loss report for a closed month, not a month still in progress.
- Switch the view to compare this period with the same period last year and look for lines that moved sharply.
- Open any line that looks odd and read the transactions behind it before trusting the total.
- Confirm the report basis (cash or accrual) matches the basis your accountant uses for the return.
- Save a copy of each month's final report so later edits to closed periods are easy to spot.
Common mistakes
- Recording loan principal payments as an expense, which makes profit look lower than it really is.
- Leaving owner purchases in expense accounts, which inflates costs and misleads anyone judging the business.
- Reading a single month in isolation, so a large annual bill paid in that month looks like a sudden loss.
Not the same as: Balance sheet
The income statement covers a stretch of time and answers whether you made money. The balance sheet is a single date and answers what you own, what you owe and what is left for the owners. See Balance sheet.
Go deeper
- Financial Ratios Small Business Owners Should Know: Learn the handful of financial ratios that matter for small businesses: margins, current ratio, debt, collection days, and how to read them.
- Building Custom Reports in QuickBooks Online: Customize, filter, memorize and schedule QuickBooks Online reports so owners see the numbers they need each month.
Try it
Related terms
- Inventory: Goods held for sale or materials used to make them, recorded as an asset until sold.
- Invoice: A bill sent to a customer for goods or services, with the amount due and terms.
- Gross profit: Revenue minus cost of goods sold, before operating expenses.
Common questions
What is an income statement?
A report of revenue and expenses over a period that shows net profit or loss.
Can you give an example of income statement?
Revenue $200,000 - COGS $120,000 - expenses $56,000 = net income $24,000.
Why does my profit and loss show a profit when my bank account is low?
Profit ignores cash timing. Unpaid customer invoices, inventory purchases, loan principal and owner draws all use cash without showing up as expenses on this report.
How often should a small business review its income statement?
Monthly is a practical rhythm. It is frequent enough to catch miscoded transactions while you still remember them and to spot a cost trend before it grows.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.