The income statement
Two of the five account types, arranged so each subtotal answers a different question about how the month went.
- Reading
- 10 min
- Teaches
- 9
- Sources
- 5
The income statement uses only the revenue and expense accounts — the temporary accounts, closed into retained earnings at each year end, because they describe a stretch of time rather than a position. Assets, liabilities and equity carry forward; performance does not.
Northwind Traders, Inc. — income statement
For the month ended 30 September 2026 · USD · Accrual basis
| Revenue | 31,500.00 |
| Cost of revenue | (17,000.00) |
| Gross profit | 14,500.00 |
| Payroll expense | (8,400.00) |
| Rent expense | (2,000.00) |
| Insurance expense | (600.00) |
| Depreciation expense | (500.00) |
| Utilities expense | (450.00) |
| Total operating expenses | (11,950.00) |
| Net income | 2,550.00 |
Read the subtotals, not the bottom line. Gross profit of $14,500 on $31,500 of revenue is a gross margin of 46% — that is the share of every dollar sold left after paying for the goods, and it is the number that decides whether the business model works at all. Net income of $2,550 is what is left after running the company for a month.
Two lines a real statement would have are missing on purpose. Northwind has no interest and no other income, so its operating income and its net income are the same $2,550. And it shows no income tax: a C corporation owes federal income tax on its profit and would provide for it under ASC 740, accruing an estimate as the year goes. The course leaves tax out so the month stays about one thing — it is not because the company would be exempt.
The conventions that make it readable
Negatives are in parentheses, not with a minus sign. Figures are tabular, so digits line up in columns whatever they are. A single rule sits above a subtotal and a double rule under a total. None of this is required by GAAP — it is presentation convention — and none of it is decoration: an accountant reads a statement by its shape before reading a single number, and a statement that does not follow the shape is read more slowly and trusted less.
What GAAP and the SEC do govern is which lines appear and in what grouping. Northwind uses the multi-step layout — revenue, then cost of revenue, then gross profit, then operating expenses — which follows the order of the captions Regulation S-X lists for a commercial company. A single-step layout that subtracts all $28,950 of expenses at once would reach the same net income and hide the gross margin.
Your turn
Take the P&L accounts off the trial balance
Only two of the five account types belong on an income statement. Copy each one's balance across — revenue as a credit, expenses as debits — and the sheet will tell you what Northwind earned.
| Row | AAccount | BName | CLine | DAmount |
|---|---|---|---|---|
| 1 | ||||
| 2 | ||||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| 7 | ||||
| 8 | ||||
| 9 | ||||
| 10 |
Set a line and an amount on the first row.
Check yourself
Northwind paid its supplier $12,000 in September. Where does that payment appear on the income statement?
Where this lesson's rules come from
Requirements, conventions and mechanics are three different things. These are the sources behind the requirements — and the ones marked as conventions are ours, not the standard-setters'.
- ASC 220Income Statement — Reporting Comprehensive IncomeFree after registration
- ASC 205Presentation of Financial StatementsFree after registration
- CON 8, Ch. 4, ¶E80–E81Definitions of revenues and expensesFree to read
- Regulation S-X, 17 CFR 210.5-03The income statement captions a registrant must presentFree to read
- ASC 740Income TaxesFree after registration
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its definition in the glossary, where it also states the authority behind it and the components that render it.
- P&LPerformance over a period
- RevenueInflows or enhancements of assets, or settlements of liabilities, from delivering goods or services — recognized when control transfers, not when cash arrives
- ExpenseOutflows or using up of assets, or incurrences of liabilities, from delivering goods or services — recognized when incurred, not when paid
- Cost of revenueThe direct costs of producing the goods or delivering the services sold in the period — the line gross profit is measured after
- Gross profitNet revenue less cost of revenue, as an amount
- Operating incomeGross profit less operating expenses — the result of the core business before interest, other income and tax
- Net incomeRevenues and gains less expenses and losses, including income tax, for the period — the bottom line of the P&L, before any allocation to non-controlling interests
- Gross marginGross margin is a profitability metric, calculated as (Revenue − COGS) ÷ Revenue.
- For the period endedThe label for a P&L or cash flow
In the founder glossary
The ideas in this lesson, explained for the founder who runs the company. Each has its own entry in the founder glossary.
See also
- Statement semanticsWhat each statement means, how it's structured, and what the components must therefore enforce.Doc
- Metric definitionsEvery metric in this system ships with its formula, its period, its inputs, and its source. A KPI without a definition is a number people argue about in meetings.Doc
- ProfitAndLossP&L with period comparison and variance.Component
- StatementTableThe shared shell: hierarchy, periods, rules.Component
- StatementRowIndent level, subtotal, total, expand.Component