Lots of SMB owners feel they do not need to understand financial statements just because they have hired professional providers of bookkeeping in Orange County California. They must understand some financial statements at least, particularly the income statement. It’s a key financial statement that outlines the profitability of your business over a specific period of time (a specific year, quarter, or month, for instance). As such, this statement is frequently called the P&L (profit and loss) statement. It showcases revenue (the sales of products and services), minus all of the expenses that were incurred by your business. Components that make up the income statement include;

1. Income: This refers to all of the revenue that has been earned from core operations of your business and also from income the business earns from secondary activities or operations such as interests you earn.
2. Costs of sold goods: This is mostly called ‘cost of sales’ or COGS. It comprises all costs that are related to the sale of any products from your business’ inventory. For service-oriented businesses, this will thus represent the cost of services that are rendered.
3. Gross profit margin or gross profit: This is the difference between the cost of sold goods and the revenue that has been earned. It is a key indicator of the ability of your business to cover all other remaining expenses that are outside the cost of sold goods. The higher this happens to be, the better it is for your business. It is to calculate just this that some businesses hire professional providers of bookkeeping services in Orange County California.
4. Operating expenses: These are related to general, selling, as well as administrative expenses. It is a line item in accounting that comprises salaries and overheads.
5. Operating income: This statement is gotten by subtracting the operating expenses of a business from its gross profit margin.
6. Depreciation: This is a financial income statement that reflects any decrease that occurs in the value of any business’ assets like any equipment that is used to generate income by the business. As tools and equipment work, with time their value is certain to drop from what they were worth when they were initially bought new.
7. Earnings before taxes and interest: This is an income statement that shows that a business has the capability for repaying any obligations it might have.
8. Interest: This is the income statement that refers to the cost a business pays to borrow funds for the purpose of financing its assets.
9. Taxes: This is a financial statement line item that represents a reflection of an estimate of the amount of money that a business is expected to pay to the internal revenue service.
10. Net income: This means a company’s actual bottom line. Nevertheless, if the business’ expenses surpass its income, the line item is then recorded as a ‘net loss’.

In concluding, lots of SMB owners do not see financial statements, particularly income statements, as important because they have hired a professional provider of bookkeeping in Orange County California. But, the statement is greatly important as it shows your taxable income. It’s crucial for investors in analyzing profitability and future growth prospects.