The Income Statement is one of the three core financial statements that form the foundation of business accounting. Its primary purpose is to show how profitable your company has been over a specific period of time. Often called a Profit and Loss statement (or P&L), it provides a clear, concise summary of your revenues and expenses, culminating in the all-important "bottom line": your net income or loss.
Understanding your Income Statement is essential for tracking performance, making strategic decisions, and communicating your company's financial health to investors, lenders, and tax authorities. It tells the financial story of your business's operations.
You can access your Income Statement in Dappr by navigating to Accounting from the main menu, then selecting Reports and statements. The Income Statement (P&L) is the default report you will see.
What is an Income Statement?
Think of the Income Statement as a financial report card for your business over a set period—for example, a month, a quarter, or a full year. It follows a straightforward formula: Revenue - Expenses = Net Income
Unlike the Balance Sheet, which provides a snapshot of your company's financial position at a single moment in time (like a photo), the Income Statement tells a story over a period (like a video). It shows the flow of money from sales and the outflow of money for costs, revealing whether your business operations were profitable during that period and how that profit was generated.
Breaking down the Income Statement
A standard Income Statement is organized from top to bottom, starting with your total revenue and systematically subtracting costs to arrive at your net income. Here are the key components you'll find on your Dappr Income Statement.
Revenue
Also known as Sales or Turnover, this is the first line on the statement. It represents the total amount of money your business has earned from its primary activities, such as selling products or providing services. This figure is recorded when the revenue is earned, which is typically when the product or service has been delivered to the customer, not necessarily when the cash is received.
Cost of Goods Sold (COGS)
This represents the direct costs associated with producing the goods or delivering the services you sell. COGS only includes expenses that are directly tied to the creation and delivery of your product. Separating these costs is vital for understanding your production efficiency.
For a retail business, COGS would include the purchase price of the inventory it sold, plus any shipping costs to acquire that inventory.
For a software company, COGS might include server hosting costs, data processing fees, and salaries for the support team that directly helps customers use the product.
For a consulting firm, COGS could be the wages paid to the consultants for the hours they worked on client projects.
For many service-based businesses, there may be no COGS at all.
Gross profit
This is calculated by subtracting the Cost of Goods Sold from your Revenue (Revenue - COGS = Gross Profit). Gross profit is a crucial metric that shows how much money the company makes from its core products or services before accounting for other operational and administrative costs. A healthy and stable gross profit margin (Gross Profit divided by Revenue) indicates your business model is efficient and your pricing strategy is sound. A declining margin might be an early warning sign of rising production costs or pricing pressure from competitors.
Operating expenses (OpEx)
These are all the costs required to run your business that are not directly part of the production process. They are the day-to-day expenses that keep your company operational, often grouped into categories like Sales & Marketing, Research & Development, and General & Administrative. Common examples include:
Salaries and wages for non-production staff (e.g., management, marketing, HR)
Rent for office space and utilities
Marketing and advertising campaigns
Software subscriptions (e.g., for project management, CRM, or communication tools)
Insurance and legal fees
Depreciation of assets (the gradual expensing of a large purchase, like a computer, over its useful life)
In Dappr, these categories are populated automatically based on how you categorize your transactions during reconciliation.
Operating income
This is calculated by subtracting Operating Expenses from your Gross Profit (Gross Profit - Operating Expenses = Operating Income). This figure shows the profit generated from the company's normal, day-to-day business operations. It is a key indicator of the core profitability of the business, excluding the effects of financing decisions (interest) and taxes. Investors often focus heavily on this number because it reflects the health and efficiency of the primary business model.
Net income (the "bottom line")
This is the final number at the bottom of the statement. It is the amount of profit or loss remaining after all expenses, including interest on debt and income taxes, have been subtracted from all revenue.
If the number is positive, your business was profitable during the period. This profit can be reinvested into the business or distributed to owners.
If the number is negative, your business incurred a loss.
It is crucial to remember that profit is not the same as cash. A profitable company can still face a cash shortage due to factors like delayed customer payments or large upfront investments.
Why is the income statement important?
Regularly reviewing your Income Statement is a vital habit for any founder or business owner. It allows you to:
Track Performance and Trends: Is your revenue growing month over month? Are certain expenses, like marketing, increasing faster than your sales? By comparing income statements from different periods, you can spot these trends, calculate key metrics like profit margins, and take corrective action if needed.
Make Informed Decisions: By understanding your profitability drivers, you can better answer critical questions. For example, "Our gross margin is shrinking. Are our material costs too high, or do we need to raise our prices?" or "We spent 20% of our revenue on a new marketing campaign. Did it lead to a proportional increase in sales?"
Secure Loans and Investment: Banks and investors will always require your financial statements, with the Income Statement being a primary focus. Lenders review it to confirm your business generates enough profit to repay debt. Investors scrutinize it for signs of a scalable and profitable business model, looking for strong revenue growth and healthy, improving margins.
Prepare for Taxes: Your Income Statement provides the foundational data needed to calculate your business's taxable income. The revenues and expenses you see on your P&L are generally the same figures you will use to prepare your annual tax returns, making it an indispensable tool for tax planning and compliance.