The Income Statement – Tracking Profitability 📊
Before we dive into Mia's story, let’s understand what an Income Statement is. Think of it as a financial report card for a business. It provides a snapshot of how much money the business earned (revenue) and how much it spent (expenses) during a specific period, usually a month or a year. The Income Statement helps business owners see whether they made a profit or incurred a loss.
The key components of an Income Statement include:
- Revenue (Sales): The total money earned from selling products or services.
- Cost of Goods Sold (COGS): The direct costs associated with producing those goods or services.
- Net Income (Profit): The money left after subtracting COGS and other expenses from revenue.
This document is crucial for understanding the financial health of a business and making informed decision for the future.
Meet Mia and Her Freelance Design Business 🎨
If Mia wants to know how much money she made (or lost) during the month, she looks at her Income Statement. This document shows how much revenue her business brought in, the costs she incurred, and how much profit she made.
Here’s how Mia’s month would look on her Income Statement (or "Profit and Loss Statement," as some call it):
Revenue (Sales): Mia completed the bakery project for $500. Additionally, she took on two smaller projects that brought in another $300. In total, her revenue for the month is $800. 💵
Cost of Goods Sold (COGS): Mia spent $100 on design software subscriptions and stock images for her projects.
Net Income (Profit): To find out how much Mia made, we subtract her costs from her sales: $800 - $100 = $700 profit.
Pretty straightforward, right? Mia made $700 in profit after covering her costs. This simple Income Statement shows her how profitable her freelance business was that month. 📈
Learn about the balance sheet and how it reflects what Mia owns and owes through the accounting equation. Read More
