Income statements are also known as Statements of Profit and Loss or P&Ls. The Income Statement reflects revenue and all expenses incurred in the production of that revenue for a specific amount of time. For example, the Twelve Month Period Ending December 31, 20XX or the One Month Period Ending May 31, 20XX.
There are three types of arts and crafts businesses and each one will have a slightly different looking income statement:
- Service - examples of services type arts and crafts businesses are those that provide design, layout or other type of non-product related help to other businesses. Your business may do the artwork for another business' brochure.
- Merchandising - this is an arts and crafts retail business. A merchandiser purchases goods from a manufacturing business and in turn sells them to the end user - a consumer like you or me.
- Manufacturing - as the name implies the arts and crafts business makes the tangible products that are sold.
You can roll one type, two types or all three types in the same business. As an example, if you make jewelry and sell it through a website, you're both a manufacturer and a merchandiser. If you dye fabric to sell to clothing designers, you're a manufacturer. If you sell artwork to a handmade greeting card designer and silk-screen your own artwork on t-shirts you sell at crafts shows, you're all three types.
In order to effectively and efficiently run their business every business owner should have a basic knowledge of how an income statement is prepared. The income statement is a valuable tool in profitability analysis, estimation of income taxes payable and to obtain funding for the business. In this tutorial, I'll show you how to prepare an income statement regardless if you're a service, merchandising or manufacturing type of business.