How to Read an Income Statement (With an Excel Example)

• Tahir Abbas
• November 06, 2026

An income statement shows whether a business made a profit over a period. It starts with revenue and subtracts costs in stages. This guide explains each line using a worked example. You can build the same report with our free income statement template.

Updated November 2026

The lines, in order

1. Revenue is what customers paid for sales. Example: $230,600 for the year.
2. Cost of goods sold is the direct cost of delivering the work: materials and direct labor. Example: $121,100.
3. Gross profit is revenue minus cost of goods sold: $109,500.
4. Operating expenses are running costs such as rent, marketing, insurance, vehicles, software and admin wages: $75,220.
5. Operating income is gross profit minus operating expenses: $34,280.
6. Net income is operating income minus interest and income tax: $34,280 – $1,680 – $9,820 = $22,780.

The two margins

Gross margin in the example is 109,500 / 230,600 = 47.5 percent. Net profit margin is 22,780 / 230,600 = 9.9 percent. Gross margin tells you about pricing and direct costs. Net margin includes everything. Our gross margin calculator works out the first one.

Excel formulas

Gross profit: =B10-B14. Operating income: =B15-B24. Net income: =B25-B27-B28. Gross margin: =IF(B10=0,0,B15/B10). Add a year total with =SUM(B7:M7).

What to look for

• Revenue trend: is it rising or seasonal? The example peaks in July at $22,450.
• Gross margin by month: a drop signals higher costs or lower prices.
• Operating expenses as a share of revenue.
• Net income: the example swings from $510 in February to $3,120 in July.

Limits

A small-business report like this can be based on cash or accruals, and tax is a figure you enter. For filed accounts follow the rules of your accountant or tax authority.

Frequently asked questions