An income statement is a type of financial statement that reports on a property’s finances for a specific period of time. Other names for an income statement are a “profit and loss statement” or a “statement of revenue and expenses.”
Income statements focus on revenue, expenses, gains and losses, without differentiating between cash and non-cash sales or payments. Included on the statement are details of the sales, the net income, and the earnings per share (EPS) to show the overall net revenue’s transformation into net earnings (net profits or loss).
Why Is an Income Statement Necessary?
For starters, having an income statement for your commercial real estate property will help you to stay organized and keep track of all money going in and out of the business. The main purpose of an income statement, though, is to show the details of profits and business activities to shareholders and investors, and to compare the property’s financial details to other properties.
Income statements also allow investors to check their progress throughout the year and make decisions about future changes or business ventures. With an income statement, investors will be able to make informed decisions about their commercial real estate venture. Creditors can also use income statements to decide whether or not to offer loans.
Finally, income statements are part of the performance report that companies have to submit to the Securities and Exchange Commission (SEC).
What Gets Covered in an Income Statement?
Operating revenue is any revenue that comes from a property’s primary activities. For instance, the operating revenue for a retail property that sells a product would be revenue gained from selling that product. For a rental property, the operating revenue is revenue gained from people paying rent.
Non-operating revenue is any revenue gained through secondary business activities. Some examples of this are interest gained from capital or income from business partnerships.
Gains refer to money made from other activities, like selling long-term assets. Some examples include unused land, subsidiary companies, or even physical products that the company might own, such as cars or computers that are no longer needed for business operation.
Any primary and secondary expenses are also included on an income statement. Some expenses, if they meet IRS guidelines, can even be written off on a tax return.
Primary activity expenses are related to any money spent on the primary activity of the commercial property, such as costs of goods sold, administrative expenses like employee salaries, electricity expenses, or research and development expenses.
Secondary activity expenses include anything that is a non-core business expense, like interest on a loan.
Losses include any expenses that go towards a property’s losses occurring over a period of time. Money spent on lawsuits, for instance, are considered a loss.
Income Statement Calculation
To complete an income statement, some mathematical calculations are necessary, the most important of which is the net income.
Net income equals expenses and losses subtracted from revenue and gains. For a more clear picture:
Net income = (revenue + gains) — (expenses + losses)
Example of an Income Statement
Publicly listed companies have their income statements available online. You can take a look at one of Microsoft’s statements here.
Microsoft separates its income statement into various categories, breaking down the revenue, cost of revenue, gross profit, operating expenses, operating income, other income, income before taxes, net income, and more. The same method of organization also applies to a commercial property income statement.
Income Statements Are Important For a Successful Business
Income statements are necessary for investors to understand their own profits and losses and make business decisions based on that information. And they’re also important to keep a business successful and running, helping to secure both loans as well as other investors.