What does an income statement tell an entrepreneur?

The income statement, which comes with a financial statement, tells an entrepreneur what the result of the company is and how it happened. The income statement shows the income that has come into the company and how money has been spent. The income statement also contains the result, which indicates whether the result is profit or loss. In other words, the income statement reflects the company’s profitability.

Here are some income statement concepts that will make the numbers in the statement easier to understand:


When reading the income statement, an entrepreneur’s attention will most often be directed on turnover and operating results as the operating results determine the company’s profitability. All accrued return on sales that have incurred are recognized as turnover. An income statement’s starting turnover can be determined like this: Turnover= return on sales- adjustments to sales.

Sales revenue

Sales revenue is the value of the products sold in the financial year in question. Revenue does not include VAT as well as random proceeds from the sale of fixed assets or sales from shareholders, for example.

Value of inventory

The value of inventory is calculated at the end of the financial year. If the value of the inventory has not decreased, products are valued according to their original purchasing price. By comparing inventory figures with what it was at the beginning of the financial year, the change in inventory can be determined. Increase in inventory over the financial year will decrease expenses whereas decrease in inventory will increase expenses. The purpose is to focus expenses which occur from the production of the product to the financial year in which the products are sold.

Other operating income and other expenses

These can be, for example, rental income, insurance compensation, marketing costs or lease payments. Loan losses also belong to this group. If the buyer is unable to pay for the product or service, credit loss will occur.

Tip: The loss of trade receivables doesn’t have to be registered until the buyer has declared bankruptcy.


So that big expenses such as equipment do not distort accounting by bringing an awfully big expense into one accounting period and nothing to the other periods, the purchase price gets divided throughout its service life. Depreciation is made yearly for the same amount according to a depreciation plan.

Operating income

Operating income is the first intermediate result in an official income statement, which tells the entrepreneur how much the actual business income is before financial items and taxes. In addition to operating expenses, operating income takes depreciation into account. Therefore, operating income= turnover- operating expenses- depreciation.

Financial income and expenses

Based on these, profit and loss can be determined before appropriations and taxes are deducted. Financial income includes interest, financial income and income from other long-term investments. Finance costs include interest costs and other borrowing costs, such as expenses incurred on loans.

Extraordinary items

Extraordinary items are based on abnormal, non-recurring and essential transactions. For example, if a trade name that is going to quit operations is selling fixed assets, the financial gains from these sales would be considered as extraordinary items.

Income tax

Income taxes are the taxes for the financial year that have been estimated through tax calculations. In other words, income taxes in the income statement are not always the taxes that are paid during that particular financial year.

Profit of the financial period

The income statement comes to an end with the net profit for the financial period. This gives a concrete answer to the profitability of the business.

In assessing the development of the profitability of the company’s operations, it is advisable to compare the income statements of the previous years. In interpreting the income statement, it is crucial for the entrepreneur to understand how the company makes decisions and to comprehend the actions that have an impact of the profitability of the company.