What’s an Income Statement? A Guide for Freelancers & Small Businesses

An income statement is one of the most important financial reports for tracking business performance. For freelancers and small business owners, it provides a clear breakdown of revenue, expenses, and net profit over a specific period.

In this guide, you’ll learn how income statements work, the difference between single-step and multiple-step formats, and how to use them to make better business decisions.

What Is an Income Statement?

An income statement, also known as a profit and loss (P&L) statement, is a financial report that shows your business’s revenue, expenses, and net income over a specific time period. According to Investopedia, it’s one of the three core financial statements that companies use to assess their financial performance.

For freelancers, the income statement is like a financial health check. It answers:

• Am I making money?
• Where is my revenue coming from?
• What expenses are eating into profits?

Unlike a balance sheet that shows your financial position at a single point in time, the income statement covers a period—typically monthly, quarterly, or annually. Learning how to read an income statement is crucial for making informed business decisions.

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The Income Statement vs. the Balance Sheet

While both are vital financial documents, they serve different purposes:

• Income statement — shows whether you earned a profit or loss over time.
• Balance sheet— shows assets, liabilities, and equity at a single moment.

Think of it this way: if the balance sheet is a photograph of your financial position, the income statement is a movie showing how your finances changed over time. Both work together to give you a complete picture of your business health.

Learn more in our balance sheet guide.

What’s the Purpose of an Income Statement?

Income statements serve multiple critical purposes for small businesses and freelancers:

• Performance tracking — A marketing consultant may discover that Q4 always brings higher revenue from holiday campaigns.
• Decision-making — A freelance graphic designer might learn that corporate branding projects bring higher margins than one-off logo jobs.
• Tax preparation — Organized expense categories simplify deductions. According to the IRS, all freelance income, whether from PayPal, ACH, or cash, must be reported.
• Business planning — Historical income statement data helps you learn how to create financial projections.
• Investor/creditor confidence — Lenders and investors require income statements to assess viability. For example, a bank may approve a business loan only after reviewing consistent profit trends.

Understanding the Income Statement

The income statement follows a simple logical flow: start with revenue, subtract all expenses, and arrive at net income. The basic formula is:

Net Income = (Revenue + Gains) – (Expenses + Losses)

These categories flow down your statement until you reach Net Income, also known as the “bottom line.” For freelancers, this final number often directly informs personal income and tax planning.

Key Components of an Income Statement

Every income statement format includes several key components that help categorize different types of business activities. Understanding each component helps you to prepare comprehensive income statements and analyze your business performance effectively.

Activity Categories

Before diving into specific line items, it’s important to understand how income statements organize business activities into broad categories:

Operating Activities – Your core business operations:

• Operating revenue from your main services or products
• Direct costs of delivering those services (Primary-Activity Expenses)
• Day-to-day operating expenses (Secondary-Activity Expenses)

Non-Operating Activities – Financial activities outside your main business:

• Non-operating revenue (interest, rental income, royalties)
• Gains from selling assets above book value
• Losses from unusual events or asset write-downs

Specific Line Items

Revenue/Sales

All money earned from business operations. QuickBooks recommends tracking revenue by category to identify your most profitable services.

Cost of Goods Sold (COGS)

Direct costs of delivering your service or product. Service-based freelancers typically have lower COGS than product businesses.

Gross Profit

Revenue minus COGS. This shows how much you keep after covering direct costs. Learn more about the difference between gross profit vs net profit.

Marketing, Advertising, and Promotion Expenses

All costs related to promoting your business, including:

• Social media advertising
• Website development
• Networking events
• Business cards and promotional materials

General and Administrative (G&A) Expenses

Overhead costs necessary for operations:

• Office supplies
• Insurance
• Accounting and legal fees
• Administrative software

EBITDA

Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric is commonly used in investment banking and comprehensive income analysis.

Depreciation & Amortization Expense

The allocation of asset costs over their useful life. For freelancers, this might include computer equipment or office furniture depreciation.

Operating Income (or EBIT)

Profit from core business activities before interest and taxes. This shows how well your main business operations are performing.

Interest

Costs related to business loans or credit lines, as well as income from interest-bearing accounts.

Other Expenses

Miscellaneous costs that don’t fit other categories, such as bank fees or one-time professional services.

EBT (Pre-Tax Income)

Earnings before taxes, showing your profit before tax obligations.

Income Taxes

All tax obligations including federal, state, local, and self-employment taxes for freelancers.

Net Income

The final “bottom line” showing your actual profit or loss after all expenses and taxes.

Income Statement Structure: Single-Step vs. Multiple-Step

Income statements can be organized in two primary formats, each serving different business needs:

Single-Step Format

All revenues (operating and non-operating) are grouped together at the top. All expenses are grouped together below. Then one subtraction gives net income. It’s quick, easy, and straightforward. Everything is in one step.

• No subtotals like gross profit or operating income.
• Formula: Total Revenues – Total Expenses = Net Income
• Best for: freelancers, consultants, and small businesses that need simplicity.

Multiple-Step Format

Breaks the results into layers to show profitability at different stages. According to the Corporate Finance Institute, the multiple-step format provides deeper analysis but is more complex to prepare, but gives managers and investors deeper insights into performance. 

• Provides more detail, separating operating vs. non-operating activities.
• Formula: 

1. Revenue – COGS = Gross Profit
2. Gross Profit – Operating Expenses = Operating Income (EBIT)
3. Operating Income ± Other Income/Expenses – Taxes = Net Income

• Best for: larger businesses, corporations, and companies with investors.

Income Statement Example

To really understand how an income statement works, let’s compare two extremes: Apple’s official 2024 SEC filing (a Fortune 500 giant) and Sarah’s consulting business (a solo freelancer). The numbers couldn’t be more different, but the principles stay the same.

Apple’s Multiple-Step Income Statement (FY 2024, in USD millions)

(from Apple’s official 10-K report)

Apple uses the multiple-step format, which separates revenue, costs, operating performance, and final profit. This helps investors analyse efficiency and profitability at each stage.

Sarah’s Single-Step Income Statement (Freelance Consultant, 2025)

Sarah’s statement follows the single-step format. All income is grouped, all expenses are grouped, and one calculation gives net income.

Sarah’s Data in a Multiple-Step Format

By rearranging Sarah’s numbers into a multiple-step format, you can see how even a small service-based business could adopt the same layered reporting style as Apple, just on a smaller scale.

Whether you’re Apple or a one-person consultancy, an income statement shows the same story: how much you earned, what it cost you, and what’s left as profit.

Uses of Income Statements

Different stakeholders use income statements for various purposes:

Investors

Potential investors analyze income statements to assess business profitability, growth trends, and management effectiveness. They look for consistent revenue growth and controlled expense management.

Management

Business owners use income statements to make operational decisions, identify profitable services, and spot cost control opportunities. A freelance graphic designer might notice that logo design projects generate higher margins than general marketing materials.

Creditors

Lenders examine income statements to evaluate loan repayment capacity. They focus on consistent profitability and cash generation ability to assess credit risk.

What Are the Four Key Elements of an Income Statement?

Every income statement contains four fundamental elements:

1. Revenue: Money earned from business operations
2. Expenses: Costs incurred to generate revenue
3. Gains: Profits from non-operating activities
4. Losses: Costs from unusual or non-operating events

These elements combine using the basic equation: Net Income = (Revenue + Gains) – (Expenses + Losses)

What Is the Difference Between Operating Revenue and Non-Operating Revenue?

Operating revenue comes directly from your core business activities. For a freelance photographer, operating revenue includes fees for photo shoots, editing services, and print sales.

Non-operating revenue comes from activities outside your main business focus, such as interest earned on business savings, rental income from subletting office space, or gains from selling business equipment.

This distinction helps evaluate how much profit comes from core operations versus incidental activities, providing insight into business sustainability.

What Insights Should You Look for in an Income Statement?

When analyzing your income statement, focus on these key insights:

• Profit Margins: Calculate gross and net profit margins to understand profitability relative to revenue. Declining margins might indicate pricing pressure or rising costs.
• Expense Patterns: Look for trends in major expense categories. Are certain costs growing faster than revenue? This might signal areas needing attention.
• Revenue Diversification: Assess whether revenue comes from multiple sources. Over-dependence on a single client or service creates business risk.
• Seasonal Variations: Compare income statements across different periods to identify seasonal patterns that might affect cash flow projections.
• Break-Even Analysis: Use income statement data with your break-even calculator to understand how many sales you need to cover costs.

Harvard Business School notes these insights help business owners make data-driven decisions about pricing, cost management, and growth strategies.

Final Thoughts

Understanding income statements is crucial for freelancers and small business owners who want to build profitable, sustainable businesses. These financial reports provide the insights needed to make informed decisions about pricing, expenses, and growth opportunities.

Whether you use a simple single-step format or a more detailed multiple-step approach, regular income statement preparation helps you track progress toward financial goals and identify areas for improvement.

Remember that income statements work best when combined with other financial reports. Consider learning about profit and loss statements and accrual basis accounting to get a complete picture of your business finances.

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