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Ecommerce Accounting Explained: What Is An Income Statement & Why Does It Matter?
May 12, 2022

Ecommerce Accounting Explained: What Is An Income Statement & Why Does It Matter?

Home » Blog » Ecommerce Accounting Explained: What Is An Income Statement & Why Does It Matter?

Estimated reading time: 10 minutes.

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How profitable is your ecommerce business?

If you’re not sure how to answer that question, you need to look at your income statement.

Don’t have one? Then make one as soon as possible so you can confidently answer when the next person asks how your online venture is going!

In this guide, we’re going to take you through the parts of an income statement, what they mean, and how to make one.

In this guide to income statements:

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What Is An Income Statement?

An income statement is one three important financial statements of a business.

It measures the business’s performance (revenue and expenses) over a given period of time.

While it is usually generated either monthly, quarterly, or annually, you can choose your time period as required.

What’s the purpose of an income statement?

It gives you an overview of how much money a company has earned (or lost) over a specific period of time.

Before we dive in, it’s important to note that an income statement can be called different things.

You might also see it labelled as one of the following:

  • Consolidated statement of earnings

  • Profit and loss statement

  • Earnings report

  • Statement of operations

  • Statement of financial performance

The good news is, income statements are fairly straightforward. We’ll look at an example soon so you can see exactly what goes where.

Why Do I Need An Income Statement?

This is like asking “Why do I need an overview of how much money I’m making?”

Of course, income statements are essential for businesses to create and maintain, for the following reasons.

Track the performance of your business.

If your business generates income statements at regular intervals, then you can analyze them closely and compare them to see what is changing.

This enables both business owners and investors to find and fix any business problems when they are small rather than after they’ve become large and expensive.

Clearly see your expenses and evaluate your budget.

By listing all the expenses like this, you can see exactly how much they’re impacting your bottom line.

This might inform where you can cut costs or how you might want to increase your budget accordingly.

Share your analysis of your company.

Investors and banks are interested in income statements.

They want to see whether their capital would be in safe hands in your company, based on what your profit and loss looks like. You can use your income statement as one of your strategic tools.

What Does An Income Statement Look Like? Here’s An Example

Now that you know what an income statement is and why you need one, let’s look at the nuts and bolts.

Below is the 2021 income statement of Microsoft.

You can see the period is ‘Year Ended June 30’. This means they’re using the fiscal year which starts in July and ends in June, rather than the calendar year that starts in January and ends in December.

The top line of an income statement refers to the first line which is revenue ($168,088m), while the bottom line means the last line which is net income ($61,271m).

Source: Microsoft

We’re going to look at the structure of this example step by step.

How To Understand An Income Statement

There are a few key elements to look at here. We’ll start at the top and work our way to the bottom.


“Revenue, often referred to as sales or the top line, is the money received from normal business operations.”

- Investopedia

This is everything that’s come in during this period.

The revenue of your ecommerce store will primarily be the income you receive from sales.

Note: Revenue is also called net sales billed or turnover.

Cost of goods sold

When you account for the sale of products and services, you must account for the cost of them in the same period.

“The cost of goods sold is essentially the wholesale price of each item, which includes the direct labor costs required to produce each product.”

- Shopify

As an ecommerce store, your costs of goods sold will include your materials, production labor (if you manufacture in-house), and all other expenses directly involved in the production.

You can calculate your costs of goods sold with this formula:

COGS = (Beginning inventory + Purchases during period) - Ending inventory.

Note:Cost of goods sold is also called cost of revenue or cost of sales.

Gross margin

Gross margin is something you calculate from the two totals above.

Gross margin = revenue - cost of good sold.

Think of this like a checkpoint. We’ll use your gross margin in other calculations, so this is like ‘saving the answer’ instead of having to go back to the beginning again every time.

Note: Gross margin is also called gross profit.

“The thing to remember is that gross profit is sales minus direct costs, not sales minus every cost. Keep that in mind and you will be able to come to a gross profit figure every time.”

- Sage

Operating expenses

To get from your gross margin to your net margin, we need to deduct a few more things.

These are commonly known as operating expenses.

“Operating expenses are important because they can help assess a company’s cost and stock management efficiency. It highlights the level of cost that a company needs to make to generate revenue, which is the main goal of a company.”

- Corporate Finance Institute

In the Microsoft example, you can see they have listed research and development, sales and marketing, and general administration.

For an ecommerce seller, the operating expenses might be:

  • Payroll: paying the wages of any staff you have.

  • Marketing: your monthly advertising budget and costs of labor.

  • General administration: any finance or legal fees you might have, for example.

Subtracting these from your gross margin takes you down to your operating income.

Operating income

Operating income = gross margin - operating expenses.

Your operating income is like another checkpoint.

“Accountants and financial analysts usually prefer to look at your operating income—rather than your net income—to determine how profitable your company is.”


There’s also a line for other income which covers things like interest on income and expenses.

Now we’re almost at the bottom line.

Net income

If we use the ‘checkpoint’ of operating income, it’s much easier than calculating it all from the top.

Net income = operating income +/- other income - provision from income taxes.

Note: Net income is also called the bottom line, net earning or net profits.

“Net profit is the money you get to hold onto. The number comes last on the profit and loss statement, which is why it’s called the bottom line. The net profit can be paid out to owners or reinvested in the business.”

- Xero

You can also see on the Microsoft example ‘earnings per share’ or EPS.

Earnings per share = net income / number of shares.

This is important if you have shareholders, but we won’t go into detail here. You can read more about basic and diluted EPS here.

So, what’s the most important thing on an income statement?

Every line is important.

When you’re making it, be accurate. If you’re certain of your figures, you can confidently use your income statement to make financial decisions.

The four parts that will draw most attention to those that see your income statement are the revenue, gross margin, operating income, and net income.

How To Prepare An Income Statement

The steps below are to give you an overview of how an income statement is compiled.

We strongly recommend that you use a cloud accounting system such as Xero or QuickBooks that will do this for you automatically.

But if you’d like to compile your income statement manually, or simply understand the process, here’s how it works.

Of course, you’ll need your financial data ready!

1. Choose the period. Will you use a fiscal year or a calendar year? Are you making one every month, or every quarter?

2. Calculate your total revenue. You’ll need to get this information from your ecommerce platform and wherever else you’re earning income from.

3. Calculate your COGS. Read this guide on how to calculate your costs of goods sold to make sure you do this accurately.

4. Calculate your gross margin. Remember how to do this? Simply subtract your COGS from your revenue. This is checkpoint #1.

5. Calculate your operating expenses. Again, this information needs to come from your financial records. Check examples of operating expenses to make sure you’ve listed them all.

6. Calculate your operating income. Use your checkpoint #1 - subtract your operating expenses from your gross margin. Your operating income becomes checkpoint #2.

7. Calculate your taxes. You should be able to get this information from your ecommerce platform if they’re paying them for you.

8. Calculate net income. From your operating income (checkpoint #2), subtract your other income and taxes to get your bottom line.

Income Statement Template

If you’d rather follow a template, you can download an income statement template from Xero here.

Now you’re on your way to making one of the fundamental financial statements for your ecommerce business. Congratulations!

Next stop:our Ecommerce Accounting Hub.

If you’re looking for guidance on documenting your business finances correctly, learn the fundamentals here or find the answer to that burning question you have.

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We’ve created an essential ecommerce bookkeeping checklist to make your whole accounting process more efficient, financially accurate, and less error prone.

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What is an income statement?

An income statement is a financial statement that shows your revenue, expenses, and profit. The purpose of it is to show how profitable a business is/was over a period of time.

What is on an income statement?

There are many lines on an income statement, but the three key areas are: revenue, expenses, and profit. This financial document shows you a company’s top line, gross profit, and bottom line.

What is an income statement formula?

The simple equation of an income statement is revenue - expenses = net income. However, there’s a bit more to it than that, as we’ve explained above.

What is another name for an income statement?

An income statement can also be called a ‘consolidated statement of earnings’, a ‘profit and loss statement’, an ‘earnings report’, a ‘statement of operations’ or a ‘statement of financial performance’.

Want to feel completely confident in your ecommerce bookkeeping?

Businesses that document their processes grow faster and make more profit. Download our free checklist to get all of the essential ecommerce bookkeeping processes you need every week, month, quarter, and year.

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