Income Statement: What It Is and How to Create One

An income statement is the financial story of your business—a monthly, quarterly, or annual tally of revenue minus expenses. It answers the question, “How profitable is your business?”

In this guide, learn how to prepare your own income statement, with the components to include and tips on how to read it. 

What is an income statement? 

An income statement is a financial statement that reports a company’s financial performance. It shows you the company’s income and expenditures over a specific period of time. The income statement is also known as a profit and loss (P&L) statement, statement of operations, or earnings statement.

Income statements sit alongside balance sheets and cash flow statements as one of three financial statements that businesses use to assess financial health.

Income statements vs. balance sheets 

An income statement shows all revenue and expenses for a specific period. A balance sheet presents a snapshot of a business’s financials. Both assess financial health and inform financial forecasts.

Here’s how income statements and balance sheets compare:

Valuable businesses aren’t always profitable, and vice versa. For example:

• A profitable business may have huge liabilities. 
• A valuable company could be unprofitable for years. Think of high-growth startups using venture capital—not revenue—to expand.

Importance of an income statement 

Income statements are important because they: 

• Help you understand revenue. The income statement provides a company’s net income or net loss by subtracting total expenses from revenue. Business decisions, such as expanding or shrinking operations, can be influenced by this figure.
• Make company analysis simple. A company’s income statement provides information to investors, lenders, and other stakeholders. It can impact investor confidence and the likelihood of securing financing or other investments by providing detailed information on revenues and expenses. 
• Allow for frequent financial reporting. Business owners monitor progress, identify trends, and find potential problems or opportunities on an income statement. You can keep profitability in check if expenses are continuously rising.

Bill Bachand, founder of Renu Therapy, recommends business owners have some form of understanding of their business’s finances.

“I’m not a financial wizard,” says Bill in a Shopify Masters interview. “But I know how to read a balance sheet and a profit and loss [sheet], and I know where different charges get coded so it all lines up. Because if you have good financials, then you can make good decisions.”

Who uses an income statement? 

Businesses use income statements to check how much revenue they’ve made, how much money they’ve spent, and how much profit they’re left with. 

If you're looking for a loan or to raise capital, you may need to include more details with a multistep income statement. Lenders and investors want to know, for example, whether your gross profit is enough to sustain a positive net income as you scale (and incur more operating expenses). Banks may also want to check if you make enough profit to pay back the loan.

Governments may also use information on an income statement to calculate taxes. In the US, if you run a sole proprietorship or single-member LLC, you’ll generally report your business income and expenses to the IRS on Schedule C (Form 1040). If you run a partnership, it’s Form 1065. Companies classified as corporations or S corps use Form 1120 and 1120-S, respectively. 

Shopify finance reports lets store owners view key financial information about their business. You can also sync financial data to accounting apps like Xero and QuickBooks through native integrations. Those accounting tools can create income statements for you. 

The key components of an income statement 

There are the key components of an income statement:

• Revenue
• COGS
• Gross profit
• Operating expenses
• Operating income
• EBT and taxes
• Net income

Revenue

Revenue is the amount of money you’ve brought into your business before any expenses after accounting for returns, discounts, and other allowances. It sits at the top of your income statement. Include revenue streams such as one-off product sales, subscriptions, and services. 

Cost of goods sold (COGS)

Cost of goods sold (COGS) is the amount of money spent to make a product. It only includes direct costs like parts, machinery, raw materials, and wages of the people involved in production. 

To calculate your COGS, use this formula:

COGS = (Beginning inventory + Purchases) − Ending inventory

Gross profit 

Gross profit shows how much money you have left after subtracting COGS. To calculate it:

Gross profit = Revenue − Cost of goods sold (COGS)

Operating expenses

Operating expenses commonly refers to the indirect costs of running a business. They’re broader than COGS and not tied to a particular product. Examples include payroll, property taxes, utilities, advertising, and rent. It can also include the depreciation of tangible assets, such as machinery, and the amortization of non-tangible assets, such as patents.

Income statements sometimes separate operating from non-operating expenses and revenue to keep one-off gains or losses from distorting the financial picture of the business. 

Operating income (EBIT) 

Operating income, often used interchangeably with earnings before interest and tax (EBIT), is a company’s profits after subtracting COGS and operating expenses from sales. To calculate it:

Operating income = Revenue − COGS − Operating expenses

EBT and taxes

Earnings before tax (EBT) is your company’s pre-tax income after deducting debt interest from operating income. This may also include other income and expenses.

Net income 

Subtract income tax paid on your EBT. The result is your net income or net earnings, which is the bottom-line number on your income statement. 

How to read an income statement

If you’re using financial accounting software to generate income statements, you’ll need to know how to read them. 

Here's how to work through each section:

• Look at the company’s revenue section. Here you’ll find the amount of money earned during the reporting period. Look for trends in revenue over time and compare them to benchmarks to understand how your company is performing.
• Examine COGS. A rising COGS can indicate increased costs or a decline in the efficiency of your production process.
• Calculate gross profit. Gross profit is the difference between revenue and COGS. It’s the profit a company makes before accounting for operating expenses.
• Look at operating expenses. Operating expenses include rent, salaries, and marketing expenses. They are deducted from gross profit. 
• Calculate operating income. Operating income is the profit a company makes after all its expenses are paid.
• Look at other income and expenses. You may choose to include non-operating income in your statement, which covers interest income, investment gains, or one-time expenses such as legal settlements. Debt interest can go here, too. 
• Calculate net income. After all expenses and income tax have been accounted for, you can determine a company’s net income and net margin. NYU Stern’s 2026 research puts the average net margin for a general retail business at 5.61%. 

Horizontal vs. vertical analysis

There are two ways to read an income statement:

Generally accepted accounting principles (GAAP)-compliant income statements support horizontal analysis. Using the same accounting method on every statement lets you spot trends and identify patterns more reliably. 

How to prepare an income statement

Accounting software like Xero and QuickBooks can prepare an income statement for you. Both integrate with Shopify to pull sales and revenue into the admin for you to reconcile besides expenses.

Here’s how to manually prepare an income statement for your business:

• Choose an accounting method and reporting period. Determine whether you’ll use the cash or accrual accounting method. Determine how long you want the statement to cover. This might be annual, quarterly, or monthly. 
• Calculate revenue. Find this figure in your Shopify Finance Summary report using Total sales breakdown. Add in any extra revenue streams if you sell outside of Shopify.
• Calculate gross profit. Determine the COGS and subtract this from your revenue. Shopify can calculate this for you if you’ve recorded the cost per item in each product page.
• Add operating expenses. This includes rent, advertising, payroll, insurance, and utilities.
• Calculate operating income. Subtract operating expenses from gross profit. Some businesses may want to include non-operating income at this stage, too

1. Determine net profit. Factor in interest and taxes from your operating income to calculate your net profit. 

Note that your income statement will look much different than that of a publicly traded company.

Apple, for example, made $109.4 billion in top-line revenue with a 50.1% bottom-line gross margin in their fiscal third quarter for 2026. They have a comprehensive income statement including financial metrics like earnings per share. 

How to create the right type of income statement 

The complexity of questions you have—and the type of income statement that will serve you best—will grow with your business. 

Single-step vs. multistep income statement

A single-step income statement is a single formula with a single summary metric:

Net income = Revenue − Expenses

A multistep income statement uses more line items and generates summary metrics from three sequential formulas:

Gross profit = Revenue − COGS

Operating income = Gross profit − Operating expenses

Net income = Operating income + Non-operating items

A more complex process offers more granular visibility into your financial situation. As you can see, it gives you two numbers—gross profit and operating income—that a single-step process does not.

Gross profit shows the ability of your product or service to generate revenue, given the costs of production. Operating income assesses the efficiency with which you sell that product or service. Do you really need those additional figures? It depends with whom you’re sharing them.

Income statement example

Here's an example of what an income statement looks like: