Do I need an Income Statement?

Comments Off on Do I need an Income Statement?

If you are starting a business or you already have a business, you will need some sort of income statement. An income statement will help you manage your business by letting you know if you made money or not. It will also let you know how much money you spent to get the income you made. You might think you have a good idea in your head of how your business is doing, but when you put it down on paper you could get a surprise. An income statement will also be necessary if you decide to get a loan from a bank or try to raise money from a private investor.

Whether you do your own taxes or you have someone do them, an income statement will make that process a whole lot easier too. And if you do pay someone to do your taxes, you might be able to save some money because a written income statement will make your tax person’s job a lot easier. When I do someone’s tax return and they bring me a pile of receipts and bank statements, I always charge more. If it takes a lot of hours to get the receipts organized, it could be $1,000 and up.


How do I Create an Income Statement?

“Income Statement” might sound like a complicated accounting document, but it’s really very simple. Your income statement is just a list of all your income and expenses. Typical income statements follow a set pattern and look a certain way. Your income statement doesn’t need to be in any official format. It doesn’t matter what order you put the income and expenses in. But you will find it more useful if you use a standard layout. A standard layout will make it easier to use your income statement for managing your business and doing your taxes.

Creating an income statement does not have to be a complicated, time consuming process. Depending on the size of your business, it might take just a few minutes a week or a couple of hours a month. If you keep up with it weekly or monthly, you will find out that it will take a lot less time than trying to catch everything up once or twice a year.

The most important thing to do is create a system you can follow. Your system can be a set of steps you take each week or month. It could also be something you do every time you make a sale or spend money in your business. If your business is online, you will need a different system than someone that sells something off line.

Use a Separate Bank Account and Credit Card

One of the simplest ways to keep track of the finances of your business is to have a checking account that you only use for your business. If you will be using a credit card for your business, have a card that you use only for business. A bank account and credit card that you only use for your business will do two things:

  1. Keep all your business transactions in one place, organized by date with the name of the person or company you paid money to. (The bank will do your bookkeeping for you)
  2. If the IRS audits you, they will ask you to bring your bank statements in. If you have non-business deposits and bills mixed in with business deposits and bills, it will be a lot harder to convince the IRS that your tax return was accurate and you didn’t cheat them.

I highly recommend using a separate bank account and credit card for your business, even if you are just starting out and not making or spending much money in your business. Separate bank accounts make everything else a lot easier.

If You Don’t Use a Separate Bank Account

You should open a separate bank account ASAP. If you are already in business and didn’t open a separate bank account, or you just don’t want to have two checking accounts to balance, you can still create an income statement. It’s just going to require some bookkeeping effort on your part.

Each time you sell something or buy something for your business, you will need to record it. Recording the transaction can be as simple as taking a picture of the receipt, scanning the receipt into a pdf file, or just writing it down. There are plenty of apps that will allow you to use a smart phone to get this done. After you scan or take a picture of the receipt, make sure you keep it, in case you need to go back and look at it.

Creating Your Income Statement

At least once a month, you should put all your transactions into categories and add them up to get a total for each category. After you add them up, put each category and its total in a list. The standard format for the list is to start with the income or sales category at the top. Then put the expense categories under the income category. This way you can subtract your expenses from your income and quickly see if you made a profit.



There are plenty of accounting apps and software that will help you create an income statement. QuickBooks is probably the most popular. Some of the apps have free versions and some are expensive. However, even the best accounting software will still require you to enter your deposits and expenses on a regular basis. If you are just starting out, the easiest way to create your income and expense list is with spread sheet software like Microsoft Excel or Google Sheets. Google Sheets is free and has more than enough features to create a basic income statement. Using a calculator and writing everything down in a notebook will work too. These options will save you money and the time of learning a new program. You can always move your bookkeeping to a QuickBooks later if your business grows enough to make it necessary.

What Categories Should You Use?

Your Income category will be the total of your sales or deposits. If you are selling more than one thing you should have a separate total for each item you sell. Your expenses should be divided into categories that make sense to you. Some common categories are: advertising, rent, office supplies, cell phone, internet, and credit card fees.

You can use as many or as few categories for income and expenses as you want. The categories should be the expenses you want to track so you can see where your money goes. Most of your expenses will be in the same categories each month so you won’t have to change them. If you spend money on something that is not in one of your categories, just add a new category.

Sample Income Statement

Here is an example of an income statement that was created using Google Sheets:

My Small Business
Income Satement
2017
Income
Consulting Sales  $ 10,000.00
E-book Sales  $   5,000.00
Total Income    $ 15,000.00
Expenses
Advertising  $      800.00
Cell Phone  $      750.00
Internet Provider  $      600.00
Web Site Hosting  $   1,500.00
Business Meals  $      500.00
Office Supplies  $      250.00
Computer Software  $      199.00
PayPal Fees  $      125.00
Credit card fees  $      150.00
Bank Charges  $      120.00
Total Expenses    $   4,994.00
     
Net Profit    $ 10,006.00

As you can see, it’s very simple but it does everything that an income statement needs to do. You can see how much money you spent on everything and how much money you made. This is all you need to do a tax return. Give your tax person this instead of a pile of receipts and they will get your tax return finished quicker and cheaper.



Nathan

Related Posts

Create Account



Log In Your Account



%d bloggers like this: