Financial Statement Series: Income Statement, Part 7, Revenue

Rylan Kaliel
May 16
6 min read

Updated: Jun 20

Two people in aprons at a cafe table, one holding a tablet, the other writing in a notebook with a calculator nearby, appear focused.

Welcome to the world of financial statements! Whether you're a budding entrepreneur or just curious about accounting, understanding the Income Statement and Balance Sheet is crucial. In the past blogs we have discussed what a Balance Sheet is and what its main components are. In this blog we will look at the Income Statement. We will begin with what an Income Statement is and how it differs from and is similar to a Balance Sheet.

What is an Income Statement?

The Income Statement, also known as the Profit and Loss statement (or P&L for short), is like a report card for your business. It shows how much money you made (revenue) and how much you spent (expenses) over a specific period, like a month or a year. The Income Statement gets a fresh start each period, so it only shows the current period's performance.

Main Components of an Income Statement

Revenue: This is the money you earn from selling goods or services. Think of it as the cash you get from customers buying your amazing products.
Cost of Goods Sold (COGS): These are the expenses directly tied to producing your products or delivering your services. For instance, if you run a cupcake shop, COGS would include the cost of flour, sugar, and sprinkles.
Selling, General and Administrative Costs (SG&A): These are the costs of running the business that aren't directly related to making your product. This includes things like rent, utilities, and your marketing budget for those flashy cupcake ads.

Why Should You Care About the Income Statement?

The Income Statement helps you see how well your business is doing in terms of profitability. By comparing revenue and expenses, you can determine whether your business is making money or losing it. It’s like stepping on a scale to check if your fitness routine is working—except it's for your financial health.

What is a Balance Sheet?

Now, let's talk about the Balance Sheet. This document is more like a snapshot of your business's financial position at a specific point in time. It lists what you own (assets), what you owe (liabilities), and what’s left over (equity).

Recap of the Main Components of a Balance Sheet

Assets: These are the things your business owns that have value. This includes cash, inventory, equipment, and that fancy coffee machine in the office.
Liabilities: These are the debts or obligations your business owes. It’s like your business's credit card balance, loans, and unpaid bills.
Equity: This is the owner's stake in the business. It’s what's left after subtracting liabilities from assets, like the frosting on the cupcake after you've paid for the ingredients.

For a more thorough look at the Balance Sheet, check out our earlier posts, starting with our What is the Balance Sheet blog.

Similarities Between the Income Statement and Balance Sheet

Both are essential tools for understanding your business's financial health.
They help you make informed decisions about managing your business.
Both are key documents that investors and lenders look at when deciding to invest in or lend to your business.

Differences Between the Income Statement and Balance Sheet

Timing: The Income Statement covers a specific period, like a month or a year. The Balance Sheet is a snapshot at a specific point in time.
Content: The Income Statement shows revenue and expenses to determine profit. The Balance Sheet lists assets, liabilities, and equity to show financial position.
Reset: The Income Statement resets each period. The Balance Sheet accumulates over time.

Example: A Cupcake Business

Let’s say you own a cupcake business. Your Income Statement for April might show:

Revenue: $10,000 (from selling cupcakes)
COGS: $4,000 (flour, sugar, etc.)
SG&A: $2,000 (rent, utilities, marketing)
Net Income: $4,000 (Revenue - COGS - SG&A)

Now that we have a better understanding of Income Statements and its components and how it is like and different from the Balance Sheet, lets look at the first segment of the Income Statement which is the revenue section.

We will discuss the expenses in the upcoming blogs, in this blog post we will focus our attention on revenue.

What is Revenue?

Not all revenue is the same. While revenue from sales reflects the core operations of the business, other sources of income, such as selling an asset, represent a different form of income that does not directly relate to the primary business activities. When a company sells an asset, such as equipment or property, the income generated is often considered a one-time gain and is categorized separately from regular revenue streams. This differentiation is crucial as it provides a clearer picture of the business's operational performance and sustainability. Regular revenue from sales indicates ongoing demand and business health, whereas income from asset sales may indicate a strategic shift or an extraordinary event.

Understanding this distinction helps in making more informed financial decisions and assessments of the company's future performance.

Various Streams of Income in Business

Running a business is a bit like juggling – except instead of balls, you're juggling different streams of income. And let's face it, some days it feels like those streams are more like trickles! Let's dive into the various ways a business can make money.

Operating Income

Main Attraction: This is the bread and butter of your business – the money you make from your core operations. Think of it as the star of the show.
Example: A bakery's operating income comes from selling delicious cakes, pastries, and bread. If they started selling car parts, well, we might need to have a serious talk about sticking to what they know best!

Sales of Investments

Money Moves: Sometimes businesses invest in other companies, stocks, or bonds. When they sell these investments, it's a nice bonus – kind of like finding money in the pocket of an old jacket.
Example: Imagine a tech company that invested in a startup. Years later, the startup becomes the next big thing, and the tech company sells its shares for a tidy profit. Cha-ching!

Selling Assets

One-Time Wonder: Businesses occasionally sell off assets like equipment or property. This isn't part of their regular income, so it's like a surprise party – exciting, but you can't count on it happening every day.
Example: A construction company selling an old bulldozer. They make some cash, but unless they've got a bulldozer tree out back, it's a one-time deal.

Rental Income

Landlord Life: If a business owns property, they might rent it out. This is a nice steady stream – like having a reliable roommate who always pays rent on time. (We can dream, right?)
Example: A retail company that owns a building and rents out space to other businesses. They get to play landlord and collect rent each month.

Interest Income

Interest-ing Times: When businesses have extra cash, they might lend it or put it in an interest-bearing account. The interest they earn is like the cherry on top of their financial sundae.
Example: A publishing company with a healthy bank balance earns interest from its savings account. It's like getting rewarded for being responsible with their money!

Royalties and Licensing Fees

Royal Treatment: If a business owns intellectual property, like patents or trademarks, they can license it out and earn royalties. It's like getting paid for letting someone else use your brilliant idea.
Example: A music company that owns the rights to hit songs earns royalties every time those songs are played on the radio. Cue the cha-ching sound effect!

Commission Income

Middleman Magic: Sometimes businesses earn money by facilitating sales for others – think of them as the matchmakers of the business world.
Example: A real estate agency earns a commission every time they help someone buy or sell a house. They make money by making connections – and probably by having a lot of business cards.

Miscellaneous Income

Grab Bag: This is the category for all those oddball sources of income that don't fit neatly anywhere else. It's like the junk drawer of business finances.
Example: A consulting firm that occasionally gets paid for giving speeches at conferences. It's not their main gig, but it adds a little extra to the coffers.

Whether your business income streams are more like rivers or trickles, understanding where the money comes from is key to staying afloat and making smart financial decisions. And remember, every stream – no matter how small – contributes to the overall flow. Happy juggling!

Summary

In conclusion, understanding the various income streams of your business is essential for making informed financial decisions and ensuring long-term success. From royalties and licensing fees to commissions and miscellaneous income, each source plays a vital role in maintaining the financial health of your enterprise. No matter the size of the revenue stream, every contribution is valuable and helps build a stable foundation.

I hope that you have found this blog informative. As always please note that the information shared here are a brief overview of a very complex area of accounting. If you have any questions about the accounting around these concepts or how to structure a business to best serve your purpose, please feel free to contact KLV accounting for a free consultation. We at KLV accounting offer free consultations on many different topics and are always happy to help.

In the next blog we will discuss the expenses and look at some examples of it.

KLV Accounting, a Calgary-based accounting firm, is here to help. Contact us today to enhance your financial strategy, minimize your taxes, and drive business success! For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.