What are the steps to Prepare an Income Analysis in 2021?

 


Introduction

An income analysis is a part of a company’s financial statements. It involves all the profit, loss, expenses, and revenues made by a company in a certain period of time. The income statement shows how the income or the profit of the company can be made out of its revenue. It provides the company with a brief survey of their financial record, allowing them to compare their internal state and condition with other business sectors.  The primary function of an income statement is to give a detailed analysis of the profit and the analysis of a business to its stake owners. The income statement begins with calculating and keeping a track of the company’s revenue by making their customers buy their products. When the total expenses of a company are subtracted from the total calculated amount in the income statement, the company generates its total income for the given period.

What are the steps to prepare an income Analysis?

The steps that are to be followed by a company to generate an income analysis are:

  • The first and foremost step to generate an income analysis is to decide the time period along which the income analysis will be calculating all the revenues, profit, and other financial aspects of the company. Without knowing the time period the income analysis will not have one of the main components for its reporting.

  • The second step is to get hold of a trial balance report from the cloud-based software of the company that accounts for the finances. It provides the company with all the necessary monetary figures that it requires to create an income statement.

  • Then the company must add up all its earnings that it has acquired through the trial balance report. It must take out all the revenues and put them up together in the statement even if they haven’t received the money in hand for their product.

  • Then the company must identify the net price incurred of all the products that it has sold throughout the given time span. It involves the cost of labor. The materials that were required to be purchased for providing their product to the customer. The company needs to sum up all the expenses that it has made for the production and selling of their product.

  • Once the company has acquired its total income and its total expenditure, the next step is to subtract the total expenditure from the total expenses spent to calculate the gross margin of the company.

  • Then the company must follow the steps of putting in the income tax and include it in the income statement.

  • The company must now calculate its income for the mentioned time. To do so, it must subtract the income tax rate from its gross margin amount that has been generated beforehand.

  • The final step is to put a mark or a logo of the company to establish it as an income statement that is copyright protected and that it belongs to your company. The company must also input a header to the report to pass it as an income statement.

Advantages of keeping an Income statement

An income statement helps in keeping a track of all the expenses and income of a company. It allows the company to put together all its expenses and incomes so that it can calculate whether it is undergoing a profit service or a loss service. Most companies can gain benefits from keeping an updated income statement. Some advantages of an income statement are:

  • It helps in providing a detailed insight on all the revenues and expenditures of the company in a given time. The income analysis is the most beneficial form of document that allows the company to analyze all its monetary translation no matter how small or big it is.

  • Keeping an income statement makes it easy when a company looks for an investor. An income statement keeps in track all the profit and the net income made by the company. So, when a company is trying to put forward its profit incurred amount, it can present the income statement in front of the investors. It also reduces the burden of researching about the company from the investors.

  • Keeping an updated income analysis statement can be a very good way to analyze the company’s performance over the long run. It can analyze every year’s income statement and conclude whether it has been gaining profit in the following years or has been eventually coming to the downfall in the profit rates.


Disadvantages of keeping an income statement

Apart from it being a very good source of data for the company to analyze all its expenses and revenues altogether, an income statement has many disadvantages that can be threatful to the company. Some disadvantages of an income statement are:

  • Sometimes, the data in the income statements can lead to misrepresentation of the company’s net income, net losses, and also the net profit. The income statement not only includes transactions that have been made to the company or by the company, but it also includes pending transactions. The company adds up all the revenues, the ones that have not yet been received by the company, and also huge expenses that come under liability in their expenses sheet. It forms a misrepresentation and huge changes in the absolute figures that are to be generated.

  • The income statement does not provide the company with an estimated expenditure and revenue for the future growth of the company. It only provides past data.

Conclusion

Every document has its pros and cons. An income statement despite having certain cons is very essential for a company to maintain its financial status. It is through the income statement that the company can decide whether they are running a profit or a loss organization and they can thus plan their expenses accordingly.


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