So like I said before, this time we’re talking about the Income Statement. This one should be easy right? I mean, we all earn an income? Well, if it’s so simple, why do so many people have balances on credit cards that they can’t pay off? (Now don’t get all up in arms about all fancy manipulations you do with credit that’s “fiscally responsible”. We’ll talk about these in a later post.)

Anyway, the income statement is a powerful tool because it tells us how much money is coming in and how much is going out. The point is to have some left over. This shouldn’t need to be said.

This financial statement is the embodiment of the old saying, “Live within your means”. Spend less than you earn. These are financial rudiments, but so many people can’t seem to put them into practice.

Now, in the last post we said that the balance sheet is a financial picture at a specific point in time which is cumulative over time. This is in contrast to the income statement which provides results over a specific amount of time. Normally you’ll have a statement for an entire year or for single months.

To put an income statement together we need to list all our sources of income. For most people this consists of your paycheck. This can also include any dividends paid from stocks and interest earned on bonds or savings and money market accounts. You might also have some business income or rental income from a rental property. In any event, all these added together make up your gross income.

Next, gather together all your expenses over the course of the same time period. Your mortgage/rent, car and utility payments. Expenses for groceries and entertainment are also included. Anything that you spend money on should be listed together to make up your expenses.

We’re almost done. Take your gross income and subtract all the expenses. This provides you with your net income. Businesses may also refer to this amount as retained earnings meaning exactly what it says: earnings retained for yourself after all expenses have been paid. The equation for net income can be plainly expressed as follows:

Net Income = Gross Income – Expenses

I really believe that the income statement is an important concept to master, but if you think it sounds too much like a budget (and we know how much everyone loves budgets), I’ll explain why I don’t actually prepare an income statement for myself. I do, however, keep a balance sheet. We’ll talk about this later though… Let the income statement sink in for awhile.

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