The income statement: an essential tool for understanding company performance

The income statement is an accounting document that measures a company's performance over a given period, usually a fiscal year. In other words, it measures profitability. It presents in detail the company's income (revenue) and expenses, classified by nature or function. In this article, we will focus on the income statement by nature, which aligns with the organization of the General Accounting Plan for SMEs.

The income statement and the balance sheet

Although the balance sheet is also an important accounting document, it represents monetary flows more abstractly. In contrast, the income statement specifies flows by clearly identifying the nature and origin of the company's income and expenses. For example, if you buy flour to make bread, this expense will be recorded in short-term supplier debts on the balance sheet and in the "raw materials" expense account on the income statement. Thus, the purchase of materials is clearly identified as an operating expense with a label during fiscal year Y.

In an accounting operation, there is always a counterpart. All movements are recorded according to a balance which, by extension, affects the accounts first and then the balance sheet and income statement. The accounting work aims to verify that this balance is respected at all times.

The different classes of the income statement

According to the law, there are two ways to publish an income statement: by function or by nature. We will focus here on the income statement by nature, which is divided into several classes:

Class 3: Net income from sales of goods and services

Income represents the company's sales according to their nature. For example, sales of goods (account 3200) and sales of services (account 3400). This class also includes changes in inventories of finished and semi-finished products and unbilled services.

Class 4: Material expenses

The main expenses are the "mandatory" costs that the company incurs to produce. For example, a restaurant buys food, a carpenter buys wood, a transportation company buys fuel. Otherwise, its commercial role cannot be fulfilled.

Class 5: Personnel expenses

All personnel expenses are included in this class: gross salary, social charges, reimbursement fees, other personnel expenses such as the end-of-year meal offered.

Class 6: Other operating expenses

Other operating expenses include secondary expenses that are not directly related to the production of the company's goods or services. Expenses for premises, maintenance, repairs, replacements, vehicle and transportation expenses. This class also includes depreciation and value adjustments on fixed asset items, as well as the financial result (account 69). In most SMEs, financial expenses exceed financial income, which justifies classifying the financial result as an operating expense.

Class 7: Non-operating income and expenses

This part of the chart of accounts includes the classification of ancillary activities defined as activities not directly related to operations but impacting the calculation of net income. These ancillary activities include the result of real estate activities.

Class 8: Exceptional, one-time or out-of-period income and expenses

Exceptional income and expenses arise from random and unpredictable events. As such, they are not part of operations. For example, the gain or loss on the sale of a fixed asset, a significant loss on a customer receivable, a burglary.

Class 9: Closing

When the company's results are published, the class 9 accounts are used to collect the balances of all the aforementioned accounts in order to show a profit or loss. Thus, the accountant closes the accounts and transfers the amounts to the 9XXX accounts.

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