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The Importance of Creating an Income Statement

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income-statementBy Ryan Laspina
Compliance and Default Prevent Specialist at American Public University System

An income statement is a financial document that provides you with a detailed account of how much money you made, how much you spent, and how much money is left over for a period. Usually income statements are made for each month. Income statements are beneficial because they can provide you with information about your earned and spent money. This information will help students create a budget for balancing their college costs (fees, tuition, room and board) and income (tuition assistance, scholarships, loans, grants). The three components of an income statement are income, expenses, and net income or loss (Lechter and Totman, pg. 47).

The first section of an income statement details your income for the period. The most common type of income is from your salary, but you may also have income from child support, alimony, interest on invested money, dividends paid out, and other sources. Essentially, any amount that you earn during that specific period is considered income. The second section of the income statement details your expenses for the period. You probably have many different types of expenses, including rent, utilities, insurance, gas, and personal expenses. Any cost that you must pay out of your income is considered an expense. Lastly, your net income or loss is calculated by subtracting your expenses from your income. If you have money left over for the period, it is considered net income. If your expenses are higher than your income, then you had a net loss for the period. It is possible to break even, which occurs when income equals expenses.

To view your financial position on a more long-term basis, it may be helpful to compare income statements from period to period. For example, if your personal expenses continue to rise from period to period, it may be time to cut back on personal spending. On the contrary, if your net income continues to rise from period to period, you would have a more legitimate case to incur more personal expenses.

While you may have seen large, intimidating income statements for corporations, creating your own income statement is relatively simple. Make sure you collect all the necessary data to find your income and expenses for the period. Pay stubs, your bank account, and any other financial documents you may have will provide you with your income summary. Bills, receipts, and your checkbook ledger will provide you with your expenses. You can handwrite your income statement, or use a Microsoft product such as Excel or Word. Creating an income statement monthly is a great way for college students to assess how much income they have to allocate to college expenses.

References

Lechter, Sharon and Angela Totman. Your Financial Mastery: Financial Literacy for the   Real World.  TechPress, Inc, 2013.  Pgs. 47-54.  Print.

About the Author

Ryan Laspina is Compliance and Default Prevention Specialist at American Public University System. He is a current MBA student at Shepherd University in Shepherdstown, WV.  Ryan studied business and English as an undergraduate. His specialties include writing, editing, and financial planning and management.

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