For most businesses, excluding companies like banks and insurance companies, income statements are pretty similar and will typically contain the following key lines. While there may be other items such as other income, these are the main ones. Let's have a look through each of them. In turn, sales or revenue, this is the top line of the income statement and shows the income generated by the core operations of the company from selling products or providing services. Sales are included here on an accruals basis, which means a sale will be included in the income statement when the sale is made, whether or not the customer has actually paid for it yet cost of sales, or cost of goods sold. This shows the cost of making or buying the products that were sold in this period or providing the services that were delivered for a manufacturer. This will include things like the cost of the materials, labor, and overheads that directly go into making the products. Sales minus cost of sales gives us our first profit metric, gross profit. This isn't always shown on the face of an income statement. It's a company's choice as to whether to include it or not, but it's a key measure of the profitability of the company. It tells us how much profit is made directly from the units that have been sold.

The next category of expenses, which is deducted in the income statement, is called selling general and administrative or SG&A expenses. This includes all of the other costs, not directly incurred in making the product or providing the service. It is the other costs of running or operating the business costs that support the activities of the business. Here we are looking at selling costs like advertising and general and admin costs like salaries, rental of a head office or research and development cost. This definitely does not include financing costs such as interest. If we take SG&A expenses away from gross profit, we get operating profit or operating income. Another crucial measure of profitability. This tells us how profitable the company's operations are. In other words, how good the company is at doing what it does. This is independent of the way the company is financed, namely how much debt is used, Which means that operating profit can be used to meaningfully compare companies even if they have different amounts of debt. We're getting towards the bottom of the income statement now, and next we pick up the impact of the company's financing choices and how this impacts the company's performance. Interest expense is shown in this item in the income statement. Interest income and potentially other investment income could also be shown here as well. Sometimes companies net all of these numbers off to have one line for all of them called net interest Income. Interest is shown here because interest in most countries is tax deductible, so it can be deducted from operating profit before tax is calculated. Maybe it's not surprising then that the next profit line on the income statement is called profit before tax from which the tax expense is deducted to give us the bottom line of the income statement, which is net income or net profit or profit after tax. This is the profit that belongs to the shareholders of the company. It is after all other expenses have been taken into account and it is this profit that is added to equity in the balance sheet at the end of the period in retained earnings. If dividends are paid, they will be taken out of retained earnings in the balance sheet, which is why dividends are never deducted as an expense within a company's income statement.