Income statement otherwise known as profit and loss statement or earnings statement, operating statement or statement of operations, is a company's financial statement that indicates how the revenue is converted into net income. This statement clearly indicates the profitability of the company.
Income statement is divided into two major sections they are Revenues and Profits, Expenses and Losses.
Revenues & Profits:
While calculating the revenues and profits they are classified based on the primary revenues, secondary revenues. Revenues generated from the primary activity of the company are considered as primary revenues. Say for a manufacturer the revenue generated from manufacturing and selling is the primary revenue.
The secondary revenues that are generated outside the prime activity like the interest of the cash, rent for building are taken as revenue from secondary activity.
The revenue generated by selling long term assets or legal suits are Gains to the company.
Expenses & Losses:
Expenses are also divided into two categories the expense incurred for primary activity, expenses incurred for secondary activity. Sales commission for a retailer would be a primary expense for a retailer. Third party manufacturing cost would be a primary expense for a manufacturer.
The expense on secondary activity would be the interest on bank loans etc. But loosing a legal suit for a land or property would be included as a loss to the company in the income statement.
Even though the income statement has all the criteria to know the profitability of a company, there is some uncertainty regarding the income statement. Income statement may have the cost that is not up to date as the transactions have to record then and there. Costs may have varied in an operational period due to so many reasons like, economic slowdown or sudden rise in prices. Estimates are better to get the approximate revenues to expenses of a company.