Running a small business involves a constant balancing act. You’re juggling product development, marketing, and keeping track of money. One of the key financial documents that helps you see if your efforts pay off is the income statement (sometimes called a statement of income or profit and loss statement). But “what does an income statement show?” and “how do you make an income statement?” can be tricky for many entrepreneurs new to the accounting world. This article aims to clear up the confusion and show you how to prepare statement of income in a straightforward way.

Below, we’ll look at why income statements matter, what line items to expect, and how to read or prepare one for your small business. We’ll also share tips for presenting the statement to potential lenders or investors, and how it interacts with other financial documents like the cash flow statement.

What Is an Income Statement?

An income statement is a financial report outlining your revenues and expenses over a specific period of time—like a month, quarter, or year. When done right, it answers two key questions:

1. How much revenue did you make? (from products or services)
2. How much profit or loss remains after subtracting costs?

Some people call it a profit and loss statement (P&L). Others name it a statement of income. Whatever you choose, the function is similar: to measure if your business is profitable during that reporting period. The statement tracks all the money coming in—sales revenue, returns, or other income—and all the money going out—cost of sales, operating costs, or taxes. The “bottom line” or net profit reveals if you’re in the black or red.

For small business owners in Canada, you typically produce this statement to share with potential lenders, the government, or to gauge how your business is performing. The
CRA (Canada Revenue Agency) often references details in your “revenues and expenses” for tax purposes, while banks or investors might want to see if you can repay a loan or handle expansions. In short, the income statement is a snapshot of financial health over a set period.

Single-Step vs. Multi-Step Approaches

Single-Step Income Statement

• Groups all revenues in one section, all expenses in another, then subtracts total expenses from total revenue to get net profit.
• Simpler, but can be less informative. You won’t see separate lines for operating vs. non-operating items, or any breakdown of cost of goods sold vs. overhead.

Multi-Step Income Statement

• Offers more detail. It starts with revenue, subtracts COGS to find gross profit, subtracts operating costs to find operating income, then accounts for other items like interest to yield net profit.
• Many small owners prefer this approach, as it clarifies your cost of sales vs. overhead, making it easier to spot problems.

For most small businesses, a multi-step statement is a good choice because you see your gross profit margin right away. If that margin is shrinking, you might be paying too much for raw materials or labor. If your net income margin is dropping, overhead might be climbing too fast.

Preparing Your Own Statement: Step by Step

1. Choose a Reporting Period

Most pick a month, quarter, or year. The key is consistency—so you can compare across periods. If you do a monthly or quarterly statement, you see trends earlier.

2. Gather Revenue Data

Collect total sales from your point of sale system, invoices, or bank statements. If you’re not mixing business and personal funds, this step is easier.

3. Identify Cost of Goods Sold

If you sell a product, note the cost per item and how many you sold. Add up direct materials, labour, or shipping from suppliers. If you run a service-based business, COGS might be minimal, but can include direct project expenses.

4. Subtract COGS from Revenue

This yields your gross profit (or gross loss). Keep an eye on that figure, because it’s your first measure of profitability.

5. List Operating Expenses

These might be salaries for admin staff, office rent, marketing spend, or insurance. Sum them in categories—like “Rent,” “Marketing,” “Utilities”—for clarity.

6. Add or Subtract Other Income/Expenses

This could be interest from a savings account or interest on a loan. Also note any unusual or nonrecurring items.

7. Calculate Income Before Taxes

Revenue minus all expenses except tax. Great for seeing how your “core operations” performed.

8. Factor in Taxes

Deduct your tax expense. If you’re a sole proprietor, you might handle personal taxes separately, but in statements, you can note an estimate.

9. Arrive at Net Profit or Net Loss

This final figure shows if you made money overall. If it’s negative, consider cost cuts or revenue-boosting strategies.

(Tip: Many free or affordable accounting software solutions let you do these steps seamlessly.)

Reading Between the Lines: What the Income Statement Shows

Line-by-Line Insight

• Sales Revenue: Are your products or services actually in demand? If revenue is stable or growing, that’s good. If it’s slumping, you might pivot your offering or marketing.
• Cost of Sales: A high ratio of cost to revenue means your gross profit margin could be too small to cover overhead.
• Operating Expenses: If overhead is ballooning, maybe you’re renting a space that’s too big, or your marketing budget is overshooting.
• Net Profit: This final line is your bottom line. If it’s too slim, see if you can raise prices, find cheaper suppliers, or cut unnecessary costs.

By analysing these lines, you can spot if your problem is in cost of goods or in overhead. That distinction is vital when deciding whether to adjust your production or your administrative spending.

Best Practices for Small Businesses in Canada

1. Reconcile with Bank Statements
   At the end of each month or quarter, ensure your recorded sales match what actually went through your account. Small discrepancies can become big if left unchecked.
2. Be Realistic with Tax Estimates
   If you’re a sole proprietor, net profit flows into your personal tax return. If you’re a corporation, you pay corporate tax, which can differ by province. Factor in these differences early.
3. Separate Overhead from COGS
   If you run a bakery, for example, separate the cost of flour and ingredients (COGS) from rent, marketing, or wages (operating). This approach helps you measure your gross margin accurately.
4. Compare to Budget
   Build a budget at the start of the year. Then, each time you finish an income statement, see if actual numbers align with your forecast. You’ll quickly catch overspending or slow revenue.
5. Review Periodically
   Don’t limit this process to year-end. A monthly or quarterly statement reveals seasonal patterns. If your overhead is stable but profit shrinks, you might need to act soon—before the year ends.

Frequently Asked Questions

1. What is an income statement, in simple terms?

It’s a financial report showing your total revenue minus expenses for a certain period. The final figure tells you if you made a profit or incurred a loss.

2. How do you make an income statement quickly?

1. Select a timeframe.
2. List all income.
3. Subtract costs (COGS), then overhead expenses.
4. Account for interest or taxes.
5. See net profit. Many accounting tools will generate it for you automatically.

3. Does an income statement replace a cash flow statement?

No. The income statement shows revenue and expenses but doesn’t track when cash changes hands. You might show a profit yet have low bank balances if customers pay slowly.

4. What if I see big changes from one period to the next?

Investigate which expense soared or if sales dipped. Income statements highlight trends, but it’s up to you to find the root cause—like seasonal demand or a price increase from suppliers.

5. How often should I update my income statement?

Monthly or quarterly is common. More frequent updates can help you correct course sooner if margins start slipping.

Conclusion and Next Steps

The income statement might sound like an “accountant’s tool,” but it’s an essential road map for small business owners. It reveals how each dollar of revenue transforms into actual profit—or doesn’t. By laying out your sales, cost of goods sold, overhead, and taxes, it shows what’s working and where you may need to tighten spending or ramp up sales efforts.

Next Steps

1. Build a Basic Template: Whether in a spreadsheet or an accounting app, create your standard income statement layout.
2. Separate COGS and Overhead: Clarity on direct vs. indirect costs helps you see if the problem is with production or general expenses.
3. Check Net Profit: If it’s steadily negative, take action—reduce costs or revise pricing. If it’s stable or rising, you’re on a good track.
4. Compare Periods: By reviewing your statement monthly or quarterly, you’ll catch early signs of trouble.
5. Consult Experts: If your statement is complex, an accountant or experienced bookkeeper can help you refine your approach and ensure compliance with Canadian tax laws.

With a reliable income statement, you’ll have the confidence to make key decisions—like adding new products, adjusting marketing budgets, or seeking financing. It’s not just a form to fill for year-end; it’s your ongoing scoreboard, letting you aim for long-term growth and financial stability in Canada’s ever-shifting market.

Key References:  

1. Investopedia – Income Statement 
2. CRA resources for small and medium businesses