To understand Income Statement, let’s begin with the example of Navya, who has been running 3 pizza outlets, named “Roma”, in different parts of her city since the last 3 months. Her outlets are located in strategic locations and attract a lot of people, leading to high sales. It is now time to file taxes and she has to prepare the income statement, balance sheet and cash flow statement of her business to understand whether she has made profits or losses during the previous financial quarter and to understand what her business owns & owes.
The income statement helps understand a company’s performance over a specific period of time. Let’s assume a time frame between 1st January 2018 and 31st March 2018. An income statement helps us understand how much money the business earned, during that specific 3-month period, by selling the goods/services it produced. It also lists out the expenses that the company incurred during the specific period and finally arrives at the profit loss number.
Let us discuss various items in these financial statements to understand them better.
Revenue is the income that a business earns by selling merchandise or offering specific services. It is also referred to as sales or turnover. Revenue is calculated for a specific period like a quarter or a year. Revenue is calculated after adjusting for discounts and product returns.
Let’s suppose between 1st January 2018 and 31st March 2018, Navya sells 10,000 pizzas and the price of each pizza is Rs.200. Her revenue earned during the quarter would be Rs.20,00,000 (10,000 * 200).
Looking at a company’s revenue is important because companies that are able to increase their sales year after year are desirable.
In case of industrial and utility companies, the total revenue is calculated as revenue from all of a company’s operating activities after deducting any sales adjustments.
In case of insurance companies, the total revenue is the total insurance related premium that the company has earned during the period.
In case of banks, total revenue is the sum of interest and non-interest income earned by the bank. Non-interest income includes fees & commissions, credit card fees, foreign currency gains etc.