What is an income statement?
Published
An income statement reports revenue and expenses over a period of time - a month, quarter, or year - ending in net profit or loss. Also called a profit and loss statement.
The equations
Gross profit = Revenue − Cost of salesOperating profit = Gross profit − Operating expensesNet profit = Operating profit − Finance costs − ZakatCOGS = Opening inventory + Purchases − Closing inventoryGross margin = Gross profit ÷ RevenueNet margin = Net profit ÷ RevenueBreak-even revenue = Fixed costs ÷ Contribution margin ratioMargin of safety = (Actual revenue − Break-even revenue) ÷ Actual revenue
A complete income statement - Al-Waha, Q2 2026
| Line | SAR | % of revenue |
|---|---|---|
| Revenue | 460,000 | 100.0% |
| Less: cost of sales | (268,000) | (58.3%) |
| Gross profit | 192,000 | 41.7% |
| Less: salaries and wages | (84,000) | (18.3%) |
| Less: rent | (36,000) | (7.8%) |
| Less: marketing | (22,500) | (4.9%) |
| Less: administrative expenses | (18,250) | (4.0%) |
| Operating profit | 31,250 | 6.8% |
| Less: finance costs | (4,000) | (0.9%) |
| Net profit before zakat | 27,250 | 5.9% |
The percentage column is the important one. Absolute figures can't be compared across periods of different size; percentages always can.
Where cost of sales comes from
The 268,000 is derived, not observed:
Opening inventory 118,400+ Purchases 290,800= Goods available 409,200− Closing inventory (141,200)= Cost of sales 268,000
This equation is why the income statement is tied to the balance sheet: the same closing inventory figure (141,200) appears in current assets.
Break-even analysis
Fixed costs = 84,000 + 36,000 + 22,500 + 18,250 + 4,000 = SAR 164,750Contribution margin ratio ≈ gross margin = 41.7%Break-even revenue = 164,750 ÷ 0.417 ≈ SAR 394,700Margin of safety = (460,000 − 394,700) ÷ 460,000 = 14.2%
What this means in practice: a revenue drop of more than 14.2% puts Al-Waha into loss. That is a far more useful management number than "net profit 27,250." The first tells you how much you made; the second tells you how close you are to the edge.
VAT collected is not revenue
One of the costliest mistakes small businesses make. Al-Waha sold SAR 460,000 and collected SAR 529,000 including tax:
Gross collected = SAR 529,000Revenue = 529,000 ÷ 1.15 = SAR 460,000Output VAT = SAR 69,000 → a balance sheet liability, not revenue
A business booking 529,000 as revenue sees:
- Revenue overstated by 15%
- Gross profit of 261,000 instead of 192,000 (a 49.3% margin instead of 41.7%)
- Net profit of 96,250 instead of 27,250
It then spends against a number that doesn't exist, and meets reality on filing day.
Profit is not cash
The income statement is prepared on the accrual basis: revenue is recognised when the sale is performed, not when it is collected. Al-Waha earned SAR 27,250, but:
Uncollected receivables = SAR 96,750Increase in inventory = 141,200 − 118,400 = SAR 22,800Owner's drawings = SAR 18,000VAT owed to ZATCA = SAR 15,200
None of those four appears on the income statement, and all four hit the bank balance directly. This is why the income statement is never read in isolation from the cash flow statement and balance sheet.
Income statement vs. balance sheet
The income statement is a film - what happened across the period. The balance sheet is a photograph - the position at one moment. The link:
Closing retained earnings = Opening retained earnings + Net profit − Drawings = 150,000 + 27,250 − 18,000 = SAR 159,250
That is exactly the figure appearing in equity on Al-Waha's balance sheet.
Frequently asked questions
What is the difference between revenue and income?
Revenue is total sales value before any costs. Income, or net profit, is what remains after all costs and expenses.
Where do owner's drawings go?
Not on the income statement at all. Drawings are not an expense; they reduce equity and appear on the balance sheet. Treating them as an expense understates reported profit and distorts anything calculated from it.
Why does gross margin matter more than the absolute figure?
Because it is comparable. Gross profit of 192,000 means nothing without knowing sales volume; 41.7% can be compared to last quarter, last year, and to other businesses in the sector.
Is depreciation a cash expense?
No. Depreciation reduces accounting profit without any riyal leaving the bank in that period. The cash left earlier, when the asset was purchased.
How often should I review it?
Monthly, once closed, against the prior month and the same month last year. An annual read arrives too late to inform any decision.