Financial statements may not immediately drum up feelings of elation—but at Bench, we think numbers can bring joy.
We put this guide together to help you understand your financial statements and put them to work for your business. We’ll walk you through the difference between income statements and balance sheets, and show you how they work together.
Understanding these statements will help you accurately assess how profitable you are, see where you can adjust spending, and help your business grow. Where there’s growth, there’s usually a cause for celebration. See? Numbers can be fun.
Income statements: help you understand your profitability
Your income statement shows you how your revenues and expenses contribute to profitability across a period of time. Most often, income statements are prepared monthly, quarterly, and annually. You can calculate them over any time period if the need arises.
Preparing an income statement is fairly straightforward—three steps to be exact. Here’s how to get started:
Step 1: Collect every journal entry made over the time period in question.
Step 2: Total all the categories of expense and categories of revenues.
Step 3: Calculate the profit by subtracting expenses from revenues.
Let’s look at a fictitious example to really break it down. We’ll use the video game maker Steam. First, Steam will organize all of their sources of revenue from the three types of games they make: First-person shooter (FPS) games, Real-Time Strategy (RTS) games and Role Playing Games (RPG).
The first part of the income statement would look like this: