The income statement (aka P&L statement) is one of the big 3 statements used in all industries. The P&L statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. In other words, it sums the operating and non-operating revenue and subtracts from that the operating and non-operating losses in a given period (typically monthly, quarterly, annually). The income statement can be calculated on a cash basis or an accrual basis. In the small business world, it's more often than not done on a cash basis. The cash basis simply records each dollar received in or paid out as it happens. In the accrual method, you recognize the revenues and expenses in the period you incurred them and you ignore when you get paid or when you pay someone. Both are defined by GAAP and both are acceptable to the IRS. You can even switch from one to the other but not whenever you want, there are rules governing that. To manage a business, using the accrual basis for your books is the best way to ensure you understand the health of the business based on the efforts you put forth in a given period. But for tax purposes, it's often more advantageous to use the cash method to reduce you tax liability and kick the tax can down the road. Both sets of books are maintained in many businesses so managers can do their job and money can stay with the business longer.
The income statement follows a general form that begins with an entry for revenue, known as the top line, and subtracts the costs of doing business, including the cost of goods sold, operating expenses, tax expenses, and interest expenses. The difference, known as the bottom line, is net income, also referred to as profit or earnings.
- Operating Revenue is the revenue you earn for providing the services. In dentistry, we call that production or more often adjusted production due to insurance adjustments for various plans you accept. If you are using cash basis accounting (which is very common), then you would use the collections or cash received to determine revenue.
- Non-operating Revenue is the revenue you earn through non-core business activities. It would include things like interest from money in the bank, royalties you might partake in, rental income from business property if it's part of the same legal structure and other items not part of the core business. It would be recorded either at the time the sale happens (accrual) or the when you collect the cash for it (cash).
- Other Income is the revenue you get from the sale of long-term assets (vehicle, equipment, furniture, etc) which are one-time non-business activity items. Unless you finance the deal, it's the same period because you are usually getting paid at the time of the sale.
- Primary Activity Expenses are all your normal operating expenses and often include things like: cost of goods sold, selling, general and administrative expenses, depreciation, amortization, personnel, utilities and more. You would recognize those in the period they happen (accrual) or when you paid them (cash) depending again on your accounting method chosen.
- Secondary Activity Expenses are your non-core business activities like interest paid to the business for loans you make.
- Losses as Expenses are all expenses that go towards the loss when selling long term assets, one time, or other unusual costs. it would even be where you fight off a lawsuit.
In dentistry, we use it to depict the following key parameters:
Collections (income), personnel, laboratory, dental supplies, office supplies, marketing and net income. We do so because those are the main categories that impact our efficiency, effectiveness and overall profitability.
