An income statement deals with the revenue of a business, but also with its expenses. Whenever a business offers some services, it gets paid for them. However, not all this amount of money turns into profit. The expenses are necessary to maintain the well-functioning of the business and of its employees.
What is an income statement?
An income statement is an account given by a company on all the revenue it has produced and all the expenses it had to support over a fixed period of time. It is situated among other financial statements a company has to do, and it basically sums up the profit the business gets in the end.
The revenue represents all the money the company gets after selling its products or services. From this revenue, it subtracts the expenses necessary for the maintenance of the office, as well as the salaries it has to pay. Therefore, the income statement is a method to find out what is the actual profit of the company.
Investors and company owners usually run income statements periodically. By comparing their initial funds with these results, they can see if their business was profitable. The income statement will show them if they have won or lost money during that particular period of time.
Expenses on income statement
All those expenses on income statement are vital to keep a business going. Of course, the purpose of a business is to bring profit. However, the owner still has to spend some money to run the activity of the company. These expenses may vary, and there are certain ways to reduce them and remove unnecessary costs that might bring your business down.
Examples of expenses on income statement
Those expenses included in an income statement represent all the costs that a business should support for it to operate. One important category is represented by salaries. A company cannot run without employees, and they need a monthly pay. The expenses also include special bonuses that they can get if they do a great job.
The next important expense is represented by utility costs. These are essential to offer the employees the necessary conditions for working. These include anything from electricity, water, gas, to kitchen utensils, cutlery, or even toilet paper for the bathrooms. The weekly cleaning services should also appear on the list of expenses on income statement.
Among other essential utility costs are the internet bills, as well as any possible phone bills. Internet is vital for the well-functioning of a business. Then, you should also consider office supplies. You might need paper, pens, as well computers, copy machines, tablets, and every equipment necessary in an office.
In the end, depending on the nature of your business, you might have to pay for some research. Both market research or scientific research might be necessary, as well as courses and training for the development of your employees.
How to include expenses on income statement list
To avoid unnecessary costs and put up an accurate income statement list, you should first see if this expense should really be included in this account. Look at the cost and see if it has been directly related to the manufacturing process of your products. Such an expense is mandatory on the income statement, and also not advisable to avoid.
Most of your expenses will be operating expenses on income statement. These are more likely to occur in an office-based company, and should also go on the income account. They are also necessary, but you might analyze them thoroughly to see if you might cut any additional cost.
How to deal with expenses on income statement
These expenses are vital for your business. Depending on the type of company, expenses can also vary. Those which are directed toward selling are more likely to have higher expenses on income statement. For instance, they need to constantly produce goods to sell, and this requires a lot of money.
Also, to maintain the selling activity at its best, you need to stay in touch with your customers. This might bring some extra costs to improve your customer support services, as well as those benefits given to the most faithful of them.
However, if your activity goes on mostly in an office, then you might cut some of the expenses. Make a list of all your costs, and see if there’s something you can afford giving up. You can opt for a more affordable price for certain utilities while still offering the best to your employees. Make sure you don’t cut the expenses too much until the working conditions will get to suffer.
Managers and agency costs
In case of a bigger business, the owner won’t take his time to deal with all these expenses. Therefore, this job will go to a manager, who is aware of all the necessary costs and the problems that need solving. However, he might not always agree with the owner, and this is where agency cost comes into being.
Owners of small businesses can take care of all the operating costs themselves, and make sure their employees work in an enjoyable environment with great conditions. However, for a bigger company, you have to trust the manager that he does the best for your employees.
Agency cost might mean some other type of conflict as well. Let’s say the owner wants certain conditions and benefits for the employees. The manager does the research, and then he presents the situation to the owner. Sometimes, the prices might be a little higher than the owner would want them to, and the two of them might start arguing.
Expenses on income statement are an important thing to consider whenever you are calculating your net income. Your profit depends on them from more points of view. The smaller the expenses, the bigger the profit, but your interest might not necessarily be to lower them. Your activity depends on a series of conditions you have to pay for, and their quality can assure you your products will bring you the long-desired customers.