Imagine a professional basketball game in which there is no score. As the final buzzer sounds, the two teams walk off the court no wiser than when they walked on.
Who won the game?
What strengths can the teams leverage going forward?
What weaknesses need to be addressed?
There are no answers to these questions because there was no score, nothing to quantify the teams’ respective successes or failures.
More fundamentally however, the lack of score calls into question the point of the game altogether. Recreational value aside, what value will the game provide without a score to concretize the results?
The same logic applies to a company without an income statement. As a general rule, a company exists to earn a profit.
How does a company know if it is fulfilling its reason for existence? Its income statement.
Also known as a profit and loss (p&l) statement or a statement of revenue and expense, this statement is one of three major financial statements and at its most basic level is the scorecard for your business over a predefined period of time. The income statement is a simple equation:
Revenue - Expense=Net Income (Loss)Revenue is the amount of money that is brought into a company by its activities. It's called "top line" because it is shown at the top of a company's income statement. An expense is the cost a business incurs through its operations.Expenses are subtracted from revenue to arrive at net income, or profit – the "bottom line" as it is shown last on a company’s income statement.If a company is not profitable, the bottom line is a net loss. Alternatively, for a profitable company, the bottom line is a net income.This is how the income statement communicates to a company if it is fulfilling its fundamental purpose for existence or not.