As a staple of personal finance, it is important that everyone know what an income statement tells us, and how to make and read one. I’ll show you what it looks like, and explain the income box and expenses box. You should be able to make your own, and tell how well you’re doing financially after I’m done with you here.
What It Looks Like
And Income Statement is basically a two boxes. The upper one labeled Income, and the lower one labeled Expenses. There are lines for the totals of these categories, and a line at the bottom of the whole statement that is used for “Monthly Cash Flow”. This line is basically the total of the upper box minus the total of the lower box, and is what tells how well you’re doing every month.
The income box is really simple, especially compared to the expenses box. If you’ve got a W2 type job, your income from that (monthly) goes on one of the lines in the income box. On the other lines are any income from investments like dividends from stocks, rent from real estate, royalties from any intellectual properties you own, and business income that you receive from any business you are invested in. Basically, all sources of monthly income that you possess, with the total at the bottom of the box on a “total Monthly Income” line.
The expenses box is simple in design, like the income box, but the expenses portion of an income statement is a bit more difficult to fill out, especially if you’ve never done it before. Don’t worry, I’ll walk you through it. First, in the expenses box, you have any debts you owe, and you put the monthly payment on each of those on separate lines in this box. Then, there’s your other fixed expenses: rent, power, water, cable, internet, phone, car, car insurance, insurance, basically any bill that is the same every month should go here. Finally, you have your variable expenses.
If you keep track of your expenses in any way (perhaps through your debit card transactions), you can fill this in fairly easily. You need to update the Income Statement monthly, and it will show you whether you’re getting more stable, or less stable. Remember to track how much you spent on gas, how much you spent on food, how much you spent on entertainment, and how much you spent on “other”. The tracking required to fill out the expenses box will be fairly illuminating for you. At the end of this box, you put a “total Monthly Expenses” line, and after a few months, you can average them, so that you don’t have to keep updating it.
Finally, how do you read this statement? Well, you can use it to get ahold of your expenses, and make them more manageable. You can use it to show when you need to supplement your income with a side-business or a side-job (preference to side-business). You can also see how much money you are making or losing every month, and stop downward trends ahead of time.