Importance Of Income Statement In A Business
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An income statement otherwise known as a profit and loss p l statement and profit and loss p l account is a record that measures and shows all the expenses and revenues a company incurred during a specific period of time.
Importance of income statement in a business. Subtracting the expenses from revenues provides the total profit during the given accounting period usually a year or a quarter of a year. Most important is that the income statement provides all the stakeholders with a summary of the company s performance during the period. The total revenues and expenses of a company are listed on its income statement. The purpose of the income statement is to show the reader how much profit or loss an organization generated during a reporting period.
There are a lot of benefits of preparing the income statement in a business entity. It gives a clear picture of a business pertaining to its profits and losses. The income statement helps determine a company s financial health and the financial progress it made during a particular. Investors and bankers also use the income statement to assess and evaluate the profitability of a company within a given period.
The income statement is important because it clearly states whether a company is making a profit. All the activity and the quantum of the activity performed by the company during the period are summarized in the income statement. The income statement is divided into three parts. The income statement is used by management within the company but also by investors and creditors outside the company to evaluate profitability performance and aid in the assessment of risk for the investor or creditor.
This information is more valuable when income statements from several consecutive periods are grouped together so that trends in the different revenue and expense line items can be viewed. Management can use the income statement to evaluate and create budgets. What is the importance of income statement in decision making process of a business.
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