The purpose of income statement (IS) is to show expenses and profits incurred by the company during its operation for the period.
Unlike a balance sheet (BS) accounts, IS accounts are not permanent. This means that when a new period starts, all of these accounts will have a beginning balance of 0.
IS is organized as follows:
Revenue is always on top. Then, cost of goods sold (COGS) are subtracted. COGS is an account consisting of inventory sold during the period.
The difference between the two gives a gross margin (GM).
Other expense accounts are listed separately, below GM.
Multiple accounts can be rolled into one.
For example, XYZ Corp. may have 2 payroll accounts, one for each different state where it has operations. On IS both accounts are rolled into one payroll expense account.
XYZ Corp has operations in Chicago, IL and Detroit, MI. Each location has accumulated $75,000 in payroll expense. IS account will show one account Payroll Expense for $150,000
All expenses will be deducted from from GM to arrive to net income (loss). Net income (loss) is then credited (debited) to an owners equity account for the opening balance in the next period.