# The income statement

> Two of the five account types, arranged so each subtotal answers a different question about how the month went.

Source: https://lopifi.com/learn/the-income-statement
Part of: Lopifi — US GAAP books on autopilot, reviewed by a CPA (https://lopifi.com)

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**How do you build an income statement from a trial balance?** Two of the five account types, arranged so each subtotal answers a different question about how the month went.

The [income statement](https://lopifi.com/md/glossary/p-and-l) 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.

*[The accounting cycle, at: statements]*

*[Profit and loss statement]*

Northwind Traders, Inc. — for the month ended 30 September 2026. USD, accrual basis.

*[Interactive figure: statement]*

The same income statement as the table above, on top of the other two — its net income is the first line of the cash flow statement and lands in retained earnings on the balance sheet. Hover to fan the set.

Read the subtotals, not the bottom line. [Gross profit](https://lopifi.com/md/glossary/gross-profit) of $14,500 on $31,500 of revenue is a [gross margin](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/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.

— [ASC 740](https://asc.fasb.org/740/tableOfContent), Income Taxes

> **Every statement states its basis.** Entity, period, currency, basis. A P&L headed only "September" is missing four facts a reader needs to know whether they can compare it to anything — and "for the month ended" (or [for the period ended](https://lopifi.com/md/glossary/for-the-period-ended)) is the right label for a P&L, where "as at" belongs on a balance sheet.

## 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](https://lopifi.com/md/glossary/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.

**Exercise — 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. Type it in the workbook at https://lopifi.com/playground.

**Check yourself.** Northwind paid its supplier $12,000 in September. Where does that payment appear on the income statement?

- As a $12,000 expense in September. — Paying a bill settles a liability. The cost of the goods reached the P&L when they were sold, not when they were paid for.

- Nowhere — the $17,000 cost of revenue is the goods sold, and payment is a balance-sheet event. — Cost of revenue follows the goods out of inventory. Whether the supplier has been paid is a question for the balance sheet and the cash flow statement.

- As $18,000 of cost of revenue — everything that was bought. — Only what was sold is a cost of this month. The $1,000 still on the shelf is an asset until it sells.

- **Lesson:** 10 of 13 — 10 min
- **Terms taught:** [P&L](https://lopifi.com/md/glossary/p-and-l), [Revenue](https://lopifi.com/md/glossary/revenue), [Expense](https://lopifi.com/md/glossary/expense), [Cost of revenue](https://lopifi.com/md/glossary/cost-of-revenue), [Gross profit](https://lopifi.com/md/glossary/gross-profit), [Operating income](https://lopifi.com/md/glossary/operating-income), [Net income](https://lopifi.com/md/glossary/net-income), [Gross margin](https://lopifi.com/md/glossary/gross-margin), [For the period ended](https://lopifi.com/md/glossary/for-the-period-ended)
- **Previous:** [Adjusting entries](https://lopifi.com/md/learn/adjusting-entries)
- **Next:** [The balance sheet](https://lopifi.com/md/learn/the-balance-sheet)
- **The course:** https://lopifi.com/learn