fbpx
Income Statement For eCommerce Business

 

How To Read An Income Statement For eCommerce Business?

The income statement of your business represents the revenues, expenses, profit or loss, or other comprehensive income. As an e-commerce business, you may earn revenues in ways different from other businesses like manufacturing. For instance, you may earn revenues from merchandising activities, memberships, subscriptions, advertising services, or other services like web hosting, content selling, etc.

Likewise, your expenses as an eCommerce business may vary relative to any other business. Examples of eCommerce expenses may include product and content costs, payment processing and related transaction costs, picking costs, packaging costs, preparing orders for shipment, etc.

Now, to know the outcome of all the operations your eCommerce business carries out during a particular period, you need to prepare a flow report called an income statement.

A flow report, such as an income statement, presents the flows of your business resulting from business operations. As an eCommerce business, your business operations may include purchasing or producing inventories, selling goods online, and collecting cash from customers.

Thus, an income statement of your business reports its financial performance during a specific period. This means as an eCommerce business, you may improve performance by increasing operating income. You can increase the operating income of your business by increasing the sale of products and services or efficiently managing operating costs.

If you are an eCommerce business and want to know how to create this flow report, then continue reading this article. In this post, we are going to talk about what is an income statement for eCommerce business, what are accounts found on income statement, and how to create income statement.

What Is An Income Statement For An eCommerce Business?

The income statement is also known as the profit and loss statement. An Income Statement is a financial statement that summarizes company revenue and expenses. It is one of the three financial statements that you must prepare to represent all the income and expense items, including other comprehensive income of your eCommerce business. In this single statement of profit and loss, you must recognize all income and expense items whenever you earn and incur such items.

Thus, the income statement of your eCommerce business represents its earning activities. It describes your online business’ outcome of all revenue-generating activities.

Now, an eCommerce income statement comprises two segments. One of the segments represents the inflow of funds that result from the goods and services you sell to your online customers. The inflows refer to the assets that your business creates by generating revenues. Such assets may include cash or accounts receivable. Say, for instance, you manufacture and sell coffee mugs on your eCommerce store. The payment that you receive on making sales on your eCommerce store is an asset for your business.

The other segment of the eCommerce income and expense statement represents the outflow of funds or resources. These are the resources that you utilize to generate sales for your online business and are called expenses. Considering the example of coffee mugs, the cost that you incur to manufacture coffee mugs including the cost of raw material, labor, storage, transportation, and overheads are the expenses that you incur to generate sales. Likewise, to boost online sales of your coffee mugs, spending money on PPC ads is an expense that you incur to generate online sales

Now, if the inflows exceed the outflows of your eCommerce business, it means it has generated net income during an accounting period. However, if outflows exceed inflows, it means your eCommerce business has incurred a net loss during a given accounting period.

Furthermore, you need to present different income and expense items of your eCommerce business in different ways in the profit and loss statement.

Accordingly, you must show income and expense items that arise in the normal course of your business separately as operating incomes and operating expenses. For instance, the income generated from the sale of coffee mugs on your online store is the operating income of your eCommerce business. The cost of fulfillment, sales, marketing, and technology for selling the coffee mugs online are operating expenses of your e-commerce business.

Likewise, you must showcase expense and income items that arise from sources other than the normal course of your business separately as non-operating expenses and non-operating incomes. For instance, the interest expense that you pay on bank loans is a non-operating expense whereas the interest income that you receive on investments is a non-operating income.

Alan Chen Freecashflow.io

Book A Call Now

Creating A Profit And Loss Statement For eCommerce Business

You must create an income statement along with the balance sheet and cash flow statement to know the financial performance of a business. 

To understand how you need to prepare an income statement for eCommerce business, let’s consider an income statement example of Amazon, one of the most successful eCommerce businesses across the world.

The following is Amazon’s Income Statement for the year ending December 31, 2020. The figures are represented in millions US$. This will act as the perfect eCommerce P&L example for you to create a Profit And Loss Statement for online business.

Income Statement For eCommerce Business Format

Particulars

2018

2019

2020

Net product sales

141,915 

160,408 

215,915 

Net service sales

90,972 

120,114 

170,149 

Total net sales

232,887 

280,522 

386,064 

Operating expenses:

 

 

 

Cost of sales

139,156 

165,536 

233,307 

Fulfillment

34,027 

40,232 

58,517 

Technology and content

28,837 

35,931 

42,740 

Marketing

13,814 

18,878 

22,008 

General and administrative

4,336 

5,203 

6,668 

Other operating expenses (income), net

296 

201 

(75)

Total operating expenses

220,466 

265,981 

363,165 

Operating income

12,421 

14,541 

22,899 

Interest income

440 

832 

555 

Interest expense

(1,417)

(1,600)

(1,647)

Other income (expense), net

(183)

203 

2,371 

Total non-operating income (expense)

(1,160)

(565)

1,279 

Income before income taxes

11,261 

13,976 

24,178 

Provision for income taxes

(1,197)

(2,374)

(2,863)

Equity-method investment activity, net of tax

(14)

16 

Net income

10,073 

11,588 

21,331 

Basic earnings per share

20.68 

23.46 

42.64 

Diluted earnings per share

20.14 

23.01 

41.83 

Weighted-average shares used in the computation of earnings per share:

 

 

 

Basic

487 

494 

500 

Diluted

500 

504 

510 

Let’s understand the list of income and expense items presented in Amazon’s income statement for the given accounting period. This can act as a great income statement template for your eCommerce business.

1. Revenues

Revenue in the income statement refers to your business’ top line or sales. Sales refer to the invoice value of goods and services that you deliver to customers through your online store during an accounting period. It represents the total amount of income that you earn from the online sale of products or services.

Furthermore, the value of invoices that your eCommerce business issues to customers is not the same as the total cash received from customers. To understand this, let’s consider the coffee mug example again.

Say, a few of your customers purchased coffee mugs from your online store via cash on delivery and others made purchases through a debit card. When customer invoices were raised on your online store, your income statement reflected sales. The amount of sales reflected in the income statement does not imply that an equivalent amount of cash was received at the time sales were made. That’s because in cases where customers purchased coffee mugs through cash on delivery, cash was not received at the time of sale. Rather it was received at a future date when goods were delivered to customers.

However, such an entry did not represent the receipt of cash from your customer at the time of sale. You received cash from your customer at a future date when the order was delivered to your customer. As a result, the value of the invoice was not the same as the cash received.

Then, the Gross Sales showcased in your eCommerce income statement does not include any taxes such as sales tax and excise tax or freight and postage. Typically, sales represent the first and usually the largest line of the income statement.

See the Amazon Income Statement for 2020. The total net sales represents the revenue that the firm has generated through the sale of products and services. Note that Amazon earns revenue through product sales on its online stores, sells content like music, movies, etc., and sells technology services to developers. Besides this, it also provides services like advertising to sellers, vendors, publishers, authors, and others through its sponsored advertisement programs.

Amazon generates revenue from retail sales, third-party seller services, subscription services, AWS, and other services.

As of December 2020, the total net sales (revenue) of Amazon Inc. was US$ 386,064 million.

2. Cost Of Sales or Cost of Goods Sold

The next item in your eCommerce income statement is the Cost of Goods Sold (COGS). COGS in eCommerce represents the costs that you directly incur to produce or purchase goods or render services to be sold to the ultimate consumers. These are the costs that are directly associated with either manufacturing the products or purchasing the products from manufacturers or wholesalers.

The COGS in eCommerce income statement may include the cost of materials and contract labor, packaging, etc. In case you are an online seller selling products sourced from manufacturers or wholesalers, then the Cost of Goods Sold in your eCommerce business represents the cost of the goods you purchased for reselling in the market.

Note that the COGS is typically variable. This means that it fluctuates with the change in the sales volume of your business. Accordingly, an increase in sales would lead to an increased cost of sales. Likewise, a decrease in sales leads to a decreased cost of sales.

Thus, the formula for the Cost Of Goods Sold is as follows:

COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock

To understand this, let’s consider the coffee mug example again.

Since you manufacture your coffee mugs, the COGS of your eCommerce business will include the cost of raw material purchased including porcelain clay, labor, paints, and glaze, etc., the cost of labor, storage cost, and heating and lighting costs. These are the direct costs of manufacturing coffee mugs in your workshop. In addition to the purchases and the direct expenses, the COGS also includes the opening stock and the closing stock of coffee mugs.

Let’s see the Amazon Income Statement for 2020 to understand how is COGS or Cost of Sales calculated. Its annual report of Amazon describes that the Cost of Sales includes the purchase price of consumer products, inbound and outbound shipping costs including costs related to sortation and delivery centers where Amazon is the transportation service provider, and digital media content costs where Amazon records revenue gross, including video and music. The Amazon’s Cost Of Sales for the year ended 2020 stood at US$ 233,307 million.

3. Operating Expenses

After COGS, the next item on your eCommerce income statement is Operating Expenses. Operating Expenses in the income statement refer to the costs that you incur to run the day-to-day operations of your eCommerce business. Such expenses may include office rent, salaries, cost advertising, warehousing costs, telephone charges, etc. In addition to these expenses, the operating expenses of your business also include depreciation. Depreciation represents the wear and tear of assets like machinery, vehicles, office equipment, and furniture over time. It is an expense that spreads the cost of an asset over its useful life.

Remember that, unlike the cost of sales, the operating expenses of your business are not the ones that can be directly linked to the production of goods or the rendering of the services being sold. These are the costs that you incur as part of the regular activities necessary to generate revenue and maintain your eCommerce business. That is, the operating expenses of your eCommerce business are distinct from the cost of goods sold (COGS), which includes the direct costs associated with producing or acquiring the goods or services that you sell as a business.

Let’s see the Amazon Income Statement for 2020 to understand what are operating expenses and how are they represented in the income statement. As per Amazon’s 2020 annual report, the operating expenses for the year ended December 2020 included:

  • Fulfillment costs incurred in fulfillment stores, physical stores, and customer service centers. These costs also included buying, receiving, inspecting, and warehousing inventories. Besides this, it also includes costs of picking, packaging, payment processing, etc.
  • Technology and contempt costs like payroll and related expenses for employees involved in researching and developing new and existing products. It also includes costs for maintaining online stores and infrastructure like servers, networking equipment, depreciation for data centers, etc.
  • Marketing costs like advertising and payroll for employees engaged in marketing activities. It also includes sales commissions related to AWS and commissions to third parties.
  • General and Administrative expenses like payroll, depreciation, rent, professional fees, and litigation costs.
  • Stock-based compensation
  • Other operating expenses

All these put together, Amazon’s operating for the year 2020 stood at US$ 363,165 million.

4. Finance Costs

The next item on the eCommerce income statement is Finance costs. Finance costs include the interest expense. The interest expense in the income statement refers to the income that you allocate towards the funds your eCommerce business borrows. Such funds are typically borrowed from banks.

Say, you already have a bank loan on the balance sheet of your eCommerce business. This is the loan that you had availed from a bank to start your coffee mug business, Now, you want to increase the sale volume of your coffee mug business. As a result, you need more labor, more raw materials, more storage space, and more tools and equipment. To incur all these costs, you need more capital. To put more capital into your eCommerce business, you take another bank loan on which you have to pay monthly interest. The interest expense that you are incurring on the initial loan and the current loan is the finance cost of your business.

Let’s have a look at the Amazon Income Statement for the year 2020 to understand what are the finance costs and how they are represented in an eCommerce income statement. As per Amazon’s annual report, the interest expense in the income statement of Amazon Inc. includes interest on notes payable paid semi-annually. Besides this, the interest expense also includes interest at LIBOR for the secured revolving credit facility that the company secured from a lender. Further, the company also has a current portion of long-term debt carrying interest.

All this put together, the finance costs for Amazon Inc. for the year ended 2020 were US$ 1,647 million.

5. Taxes

After finance costs, the next item in the income statement for eCommerce business is taxes. Taxes in the income statement represent the corporation tax or income tax and other taxes. The income statement never showcases sales tax. Sales tax is always showcased as a liability on the balance sheet. This sales tax liability increases or decreases as you collect or remit sales tax to the concerned sales tax authority.

Let’s look at Amazon Inc’s 2020 income statement to understand what are the taxes that Amazon pays. As per Amazon’s annual report, the income statement of Amazon Inc. as of December 31, 2020, showcased income taxes, including federal taxes and foreign income taxes. Further, the tax balance also includes Deferred Income Tax balances.

All of these put together, Amazon’s taxes for the year ended December 31, 2020, were US$ 2,863 million.

6. Net Profit After Taxes

The next important item in the eCommerce income statement is the Net Profit. The Net Profit in the income statement represents the difference between total revenues or incomes earned and total expenses that your eCommerce business incurs during an accounting period.

It tells you and all the other stakeholders how much income your eCommerce business earned or lost during a given accounting period.

Note that your income statement showcases Operating Profit and Gross Profit. The operating profit of your business how efficient you are in controlling the production and operating costs of your eCommerce business. The gross profit of your business represents how profitable your business is in selling its products or services. It tells whether the production and pricing of your eCommerce business are efficient enough to meet its revenue goals. Finally, the Net Profit of your eCommerce business showcases the amount of total profit that you have earned after incurring all expenses.

Let’s see Amazon’s 2020 income statement to understand net profit after taxes. As per Amazon’s 2020 annual report, the operating income of Amazon Inc. represents the operating income from North America, AWS, and international operations. The operating income of North American and international operations increased relative to the previous year due to increased unit sales. These sales included sales by third-party sellers and advertising sales.

Likewise, the operating income from AWS operations increased relative to the previous year. This was on account of the increased customer usage and cost structure productivity.

Thus, the total net income of Amazon Inc as of December 31, 2020 was US$ 21,331 million.

eCommerce Income Statement Journal Entries

The following section lays out the journal entries that you need to record in the basic book of original entries called a journal. 

1. Revenue Recognition

The journal entry for revenue recognition depends on the nature of the transaction and the timing of revenue recognition under the accounting standards (such as Generally Accepted Accounting Principles or International Financial Reporting Standards).

In the case of a point-of-sale transaction where the revenue is recognized immediately when the sale occurs, the journal entry is as follows:

Date

Particulars

Amount

Amount

2024, Jan 1

Cash (Dr)

$ X,XXX

 

    To Sales Revenue (Cr)

 

$ X,XXX

This entry recognizes the revenue as soon as the sale is made and the customer pays in cash. 

In the case of credit sales where the revenue is recognized when the product or service is delivered, even if payment is received later, the journal entry is:

Date

Particulars

Amount

Amount

2023, Jan 1

Accounts Receivable (Dr)

$ X,XXX

 

    To Sales Revenue (Cr)

 

$ X,XXX

This entry recognizes the revenue when the product or service is provided to the customer, and you as a business expect to collect the payment at a later date.

2. Cost of Goods Sold (COGS)

To recognize the cost of goods sold associated with the sale, the journal entry is:

Date

Particulars

Amount

Amount

2023, Jan 1

Cost Of Goods Sold (Dr)

$ X,XXX

 

  To Inventory (Cr)

 

$ X,XXX

3. Recognizing Other Revenues

For non-sales revenues, such as interest income or rental income, the journal entry may be:

Date

Particulars

Amount

Amount

2023, Jan 1

Cash or Accounts Receivable (Dr)

$ X,XXX

 

 To Other Revenue (Cr)

 

$ X,XXX

4. Recording Operating Expenses

Operating expenses include items like salaries, utilities, and rent. Accordingly, the journal entry will be:

Date

Particulars

Amount

Amount

2023, Jan 1

Operating Expense Accounts (e.g., Rent Expense, Salaries Expense) (Dr)

$ X,XXX

 

To Cash (if paid) or Accounts Payable (if unpaid) (Cr)

 

$ X,XXX

5. Depreciation Expense

For the allocation of the cost of long-term assets, such as equipment or buildings, over their useful lives, the journal entry for depreciation is:

Date

Particulars

Amount

Amount

2023, Jan 1

Depreciation Expense (Dr)

$ X,XXX

 

To Accumulated Depreciation (Cr)

 

$ X,XXX

6. Interest Expense

To record interest on loans or debts, the journal entry may be:

Date

Particulars

Amount

Amount

2023, Jan 1

Interest Expense (Dr)

$ X,XXX

 

To Cash or Interest Payable (Cr)

 

$ X,XXX

7. Income Tax Expense

To recognize income tax owed, the journal entry is:

Date

Particulars

Amount

Amount

2023, Jan 1

Income Tax Expense (Dr)

$ X,XXX

 

To Income Tax Payable (Cr)

 

$ X,XXX

8. Gains and Losses

For gains (or losses) not related to the primary business activities, the journal entry will depend on the nature of the gain. Let’s understand what are the different types of non-operating or extraordinary gains that your business can generate:

a. Sales Of Investments

If your business sells investments, such as stocks or bonds, resulting in a gain, the journal entry is:

Date

Particulars

Amount

Amount


2024, Jan 1

Cash (or Accounts Receivable) (Dr)

$ X,XXX

 

To Investment (at cost) (Cr)

 

$ X,XXX

To Gain On Sale Of Investmentst (Cr)

 

$ X,XXX

b. Sale of Fixed Assets

If you sell a fixed asset (property, plant, equipment) at a gain, the journal entry for the same is:

Date

Particulars

Amount

Amount

2024, Jan 1



Cash (or Accounts Receivable) (Dr)

$ X,XXX

 

Accumulated Depreciation (Dr)

$ XXX

 

To Fixed Asset (at book value) (Cr)

 

$ X,XXX

To Gain On Sale Of Fixed Assets (Cr)

 

$ XXX

c. Insurance Settlement

If you receive an insurance settlement resulting in a gain, the journal entry for the same will be:

Date

Particulars

Amount

Amount


2024, Jan 1

Cash (or Accounts Receivable) (Dr)

$ X,XXX

 

To Insurance Settlement Revenue (at cost) (Cr)

 

$ X,XXX

To Gain On Insurance Settlement (Cr)

 

$ X,XXX

d. Foreign Exchange Gain

If you as a business realize a gain due to favorable foreign exchange rate changes, the journal entry for the same will be:

Date

Particulars

Amount

Amount

2024, Jan 1

Cash (or Accounts Receivable) (Dr)

$ X,XXX

 
 

To Foreign Exchange Gain (Cr)

 

$ X,XXX

e. Legal Settlement

If you receive a legal settlement resulting in a gain, the journal entry for it will be:

Date

Particulars

Amount

Amount


2024, Jan 1

Cash (or Accounts Receivable) (Dr)

$ X,XXX

 

To Legal Settlement Revenue (Cr)

 

$ X,XXX

To Gain On Legal Settlement (Cr)

 

$ X,XXX

9. Dividends Declared

If you as a company declare dividends, the journal entry for it will be:

Date

Particulars

Amount

Amount

2024, Jan 1

Retained Earnings (or Dividends Declared) (Dr)

$ X,XXX

 

To Cash or Dividends Payable (Cr)

 

$ X,XXX

10. Closing Entries

At the end of the accounting period, you need to close temporary accounts like revenue, expense, and dividend. The journal entry for closing these accounts will be:

Date

Particulars

Amount

Amount

2024, Jan 1





Revenue Accounts (Sales Revenue, Other Revenues) (Dr)

$ X,XXX

 

Expense Accounts (COGS, Operating Expenses, Interest Expense, etc.) (Dr)

$ XXX

 

To Income Summary (or Retained Earnings) (Cr)

 

$ X,XXX

To Dividends Declared (Cr)

 

$ XXX

Analyzing An Income Statement For eCommerce Business Example

The following is the statement of income and expenses for Amazon Inc. It can act as a perfect Profit and Loss Statement or Income Statement Template for an e-commerce business.  

Amazon Inc. Consolidated Statement Of Profit And Loss (in Million US$)

Particulars 2018 2019 2020
Net product sales 141,915  160,408  215,915 
Net service sales 90,972  120,114  170,149 
Total net sales 232,887  280,522  386,064 
Operating expenses:      
Cost of sales 139,156  165,536  233,307 
Fulfillment 34,027  40,232  58,517 
Technology and content 28,837  35,931  42,740 
Marketing 13,814  18,878  22,008 
General and administrative 4,336  5,203  6,668 
Other operating expenses (income), net 296  201  (75)
Total operating expenses 220,466  265,981  363,165 
Operating income 12,421  14,541  22,899 
Interest income 440  832  555 
Interest expense (1,417) (1,600) (1,647)
Other income (expense), net (183) 203  2,371 
Total non-operating income (expense) (1,160) (565) 1,279 
Income before income taxes 11,261  13,976  24,178 
Provision for income taxes (1,197) (2,374) (2,863)
Equity-method investment activity, net of tax (14) 16 
Net income 10,073  11,588  21,331 
Basic earnings per share 20.68  23.46  42.64 
Diluted earnings per share 20.14  23.01  41.83 
Weighted-average shares used in the computation of earnings per share:      
Basic 487  494  500 
Diluted 500  504  510 

The revenues of your business for the current year compared to the previous showcase growth in sales if there is an increase. However, a decrease in revenues for the current year relative to the previous year shows a decline in sales.

Likewise, the operating income showcases the efficiency of your business. In other words, it demonstrates how well a business manages its costs and increases sales. 

Similarly, the business expenses for the current accounting period relative to the previous period showcase how the total expenses have changed.

Now, there are different types of income statements, each serving a specific purpose or reflecting different aspects of your business’s financial performance. You can use any of these to analyze the income and expenses of your eCommerce business. 

1. Single-Step Income Statement

A Single-Step Income Statement is a format of a simplified income statement that presents all revenues and gains together and then subtracts all expenses and losses to calculate the net income or net loss of your e-commerce business for a specific period. This type of income statement is called “single-step” because it involves a single calculation or subtraction to arrive at the bottom line.

In a Single-Step Income Statement, you need to group all items into broad categories, making it easy to understand the overall financial performance of your business. Typically, small business owners use the Single-Step Statement Of Income format. Businesses also use this format of income statement for internal reporting where a more detailed breakdown of revenues and expenses is not required.

However,  large and more complex businesses preferably use a Multi-Step Income Statement as it provides a more detailed analysis of operating and non-operating activities.

The structure of a Single-Step Income Statement typically includes the following main sections:

Income Statement For eCommerce Business

  • Revenues
    • Sales Revenue
    • Other Revenues and Gains
    • Total Revenues (Sales Revenue + Other Revenues and Gains)
  • Expenses
    • Cost of Goods Sold (COGS)
    • Operating Expenses (e.g., selling, general, and administrative expenses)
    • Other Expenses and Losses
    • Total Expenses (COGS + Operating Expenses + Other Expenses and Losses)
  • Net Income (or Net Loss)
    • Net Income (or Net Loss) = Total Revenues − Total Expenses

Example Of Single-Step Income Statement

Let’s consider the coffee mug example again. Say, the following is the single-step income statement for the year ended December 31, 2024, of your eCommerce business. As per the income statement, your online sales revenue for the accounting period stood at US$ 200,000 and the other revenues and gains from offline sales were US$ 150,000. Thus, your total revenues for the year stood at US$ 300,000. 

Then, your total expenses for the year were US$ 130,000. These expenses included your Cost of Goods Sold (COGS) (US$ 80,000), operating expenses (US$ 30,000), and other expenses and losses (US$ 20,000). 

As you can see, to calculate your net income in a single-step income statement, you simply need to showcase the revenues and expenses of your eCommerce business and then deduct total expenses from total revenues. Accordingly, the net income/loss for your business for the accounting period stands at $220,000.

Items

Amount (in US$)

Revenues

Sales Revenue

200,000

Other Revenues and Gains

150,000

Total Revenues

350,000

Expenses

Cost of Goods Sold (COGS)

80,000

Operating Expenses

30,000

Other Expenses and Losses

20,000

Total Expenses

130,000

Net Income (or Net Loss)

220,000

2. Multi-Step Income Statement

A Multi-Step Income Statement is a more detailed and sophisticated format of an income statement that breaks down the calculation of net income into multiple steps. This type of income statement provides additional subtotals, making it easier for you to analyze various aspects of your business’s financial performance. It separates operating revenues and expenses from non-operating items, thus providing you with a more comprehensive view of the sources of income and the costs associated with generating that income.

Note that a Multi-Step Income Statement provides more insights into your company’s profitability by separating various components of revenues and expenses. Furthermore, it is commonly used for external financial reporting, as it allows you as an eCommerce business owner and the other stakeholders including analysts, investors, etc. to assess the operating performance and profitability of your business in a more granular way.

The structure of a Multi-Step Income Statement typically includes the following main sections:

Income Statement For eCommerce Business

  • Operating Revenues
    • Sales Revenue
    • Sales Returns and Allowances
    • Discounts
    • Net Sales (Sales Revenue – Sales Returns and Allowances − Discounts)
  • Gross Profit (Net Sales−Cost of Goods Sold (COGS))
  • Operating Expenses
    • Selling Expenses (e.g., sales commissions, advertising)
    • General and Administrative Expenses (e.g., rent, salaries, utilities)
    • Total Operating Expenses (Selling Expenses+General and Administrative Expenses)
  • Operating Income
    • Operating Income (Gross Profit – Total Operating Expenses)
    • Operating Income (Gross Profit−Total Operating Expenses)
  • Non-Operating Items
    • Other Revenues and Gains
    • Other Expenses and Losses
    • Net Non-Operating Items (Other Revenues and Gains−Other Expenses and Losses)
  • Net Income (or Net Loss) Calculation
    • Net Income (Net Non-Operating Items + Operating Income)
    • Net Income (or Net Loss) (Operating Income+Net Non-Operating Items)

Let’s consider the following multi-step statement of income to understand each of its components and how they are represented.

Multi-Step Income Statement Example

Let’s consider the coffee mug example again. Say, the following is the multi-step income statement for the year ended December 31, 2024 of your eCommerce business. As per the multi-step income statement, you need to showcase your operating revenues and operating expenses separately.

Accordingly, your multi-step income statement will first begin with operating revenues. Your online sales revenue for the accounting period stood at US$ 500,000, the Sales Returns and Allowances were US$ 5,000, and the discounts were US$ 1,000. Thus, your net sales or net operating revenues for the year were US$ 300,000. 

After showcasing operating revenues, you need to showcase Gross Profit. The Gross Profit is nothing but the difference between Net Sales and COGS. The COGS is calculated using the following formula:

COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock

Let’s say your eCommerce business had opening stock worth US$ 100,000, purchases worth US$ 180,000, direct expenses worth US$ 150,000, and closing stock worth US$ 100,000. Thus, you had a Cost Of Sales worth US$ 330,000.

Thus, your Gross Profit for the accounting period was US$ 164,000 (Net Sales – COGS = US$ 494,000 – US$ 330,000).

After showcasing Gross Profit, the next item that you have to showcase in your multi-step income statement is operating expenses. Your operating expenses for the current account period included selling expenses worth US$ 20,500 and general and administrative expenses worth US$ 30,000. Thus, your total operating expenses for the year were US$ 50,500.

The next line item after Gross Profit in your multi-step income statement is operating income. Operating Income is nothing but the difference between the Gross Profit and Operating Expenses of your eCommerce business. Accordingly, the Operating Income of your business for the current accounting period was US$ 113,500 (US$ 164,000 – US$ 50,500).

After operating income, the next line item in a multi-step income statement is Non-Operating items. Your Non-Operating Items had Other Revenues and Gains of US$ 500 and Other Expenses and Losses of US$ 1,500. Thus, the Net Non-Operating Items of your eCommerce business for the accounting period were US$ (1,000). (US$ 500 – US$ 1,500)

The final item in the multi-step income statement is Net Income/Net Loss. The Net Income/Net Loss is the sum of income from net non-operating items and operating items. Accordingly, the Net Income/Net Loss of your business for the current accounting period stands at US$ 112,500.

Items

Amount (in US$)

Operating Revenues

Sales Revenue

500,000

Sales Returns and Allowances

5,000

Discounts

1,000

Net Sales

494,000

Gross Profit

164,000

Operating Expenses

Selling Expenses

20,500

General and Administrative Expenses

30,000

Total Operating Expenses

50,500

Operating Income ()

113,500

Non-Operating Items

Other Revenues and Gains

500

Other Expenses and Losses

(1,500)

Net Non-Operating Items

(1,000)

Net Income (or Net Loss)

112,500

3. Comparative Income Statements

The comparative income statement showcases your business’s profitability and financial position for different periods in a comparative format.

Such a comparison of financial data gives insights into the financial performance of your business over two or more periods. 

Note that the financial data represented in the income statements for different periods can be compared only when the same accounting principles are used to prepare the income statements. If the same accounting principles are not used to prepare the income statements for different periods, then it must be mentioned in the footnotes. 

The comparative financial data showcases the trend as well as the direction of the financial position and operating results of a business. Since the data of different accounting periods is compared horizontally in the income statement, this analysis is also known as ‘horizontal analysis’.

The structure of a Comparative Income Statement typically includes the following main sections:

Income Statement For eCommerce Business

The following is the comparative income statement of Amazon Inc. to help you understand the format of the comparative income statement.

Comparative Income Statement Example

The following is the comparative income statement of Amazon Inc. As showcased, the comparative income statement of Amazon showcases the revenue and expense items for the accounting periods 2017, 2018, 2019, and 2020. This allows a side-by-side comparison of revenues, expenses, and net income. 

Amazon’s total revenue increased from US$ 280,522,000 in 2019 to US$ 386,064,000, an increase by 38%. Likewise, the Net Income increased from US$ 11,588,000 IN 2019 to US$ 21,331,000 in 2020, an increase by 84%.

This way, you can compare the percentage changes over different periods and highlight the percentage increase or decrease in each line item compared to the prior period. This provides insights into the magnitude of changes relative to the size of your business.

Comparative Income Statement Of Amazon Inc

Period Ending: 12/31/2020 12/31/2019 12/31/2018 12/31/2017
Total Revenue $386,064,000 $280,522,000 $232,887,000 $177,866,000
Cost of Revenue $233,307,000 $165,536,000 $139,156,000 $111,934,000
Gross Profit $152,757,000 $114,986,000 $93,731,000 $65,932,000
Operating Expenses        
Research and Development
Sales, General and Admin. $129,858,000 $100,445,000 $81,310,000 $61,826,000
Non-Recurring Items
Other Operating Items
Operating Income $22,899,000 $14,541,000 $12,421,000 $4,106,000
Add’l income/expense items $2,926,000 $1,035,000 $257,000 $548,000
Earnings Before Interest and Tax $25,825,000 $15,576,000 $12,678,000 $4,654,000
Interest Expense $1,647,000 $1,600,000 $1,417,000 $848,000
Earnings Before Tax $24,178,000 $13,976,000 $11,261,000 $3,806,000
Income Tax $2,863,000 $2,374,000 $1,197,000 $769,000
Minority Interest $16,000 -$14,000 $9,000 -$4,000
Equity Earnings/Loss Unconsolidated Subsidiary
Net Income-Cont. Operations $21,331,000 $11,588,000 $10,073,000 $3,033,000
Net Income $21,331,000 $11,588,000 $10,073,000 $3,033,000
Net Income Applicable to Common Shareholders $21,331,000 $11,588,000 $10,073,000 $3,033,000

Source: Nasdaq

4. Contribution Income Statement

A Contribution Margin Income Statement is a type of income statement that emphasizes the contribution margin of your e-commerce business, which is the difference between total sales revenue and variable expenses. This type of income statement serves several important purposes for your business.

For instance, the Contribution Margin Income Statement helps your business to analyze the profitability of individual products or services. By focusing on the contribution margin, which represents the amount available to cover fixed expenses and contribute to profit, you can identify which products or services are the most and least profitable. By identifying products or services with higher contribution margins, you as an eCommerce business can allocate resources to those areas that contribute more significantly to the overall profitability of your business.

In addition to this, by understanding the contribution margin, you can assess the impact of price changes on overall profitability and determine the optimal pricing strategy for your business. How?

Well, the Contribution Margin is the difference between total sales revenue and variable expenses. It represents the amount available to cover fixed expenses and contribute to profit. By understanding the contribution margin for a single product, you as a business can assess the profitability of each unit sold. When you know how much profit a single product or product type generates, you can easily evaluate the impact of changes in product prices on the contribution margin and, consequently, the overall profitability of your business. This is how the Contribution Margin Income Statement helps you in understanding price sensitivity.

In addition to determining the profitability of individual products and assessing the impact of price changes on overall profitability, the Contribution Margin Income Statement is a valuable tool for determining product pricing. 

Since contribution margin is the difference between total sales revenue and variable expenses, it helps you to identify the minimum price (floor) at which you should sell a product to cover variable expenses and contribute to fixed expenses and profit. Likewise, contribution margin helps you to identify the maximum price (ceiling) that your customers are willing to pay without negatively impacting sales volume.

The structure of a Contribution Margin Income Statement typically includes the following main sections:

Income Statement For eCommerce Business

Contribution Margin Income Statement Example

Let’s consider the coffee mug example again. As per the income statement, your online sales revenue for the accounting period was US$ 300,000, the opening stock was US$ 100,000, purchases were US$ 180,000, direct expenses were US$ 150,000, and closing stock was US$ 100,000. Thus, your Cost Of Sales was US$ 330,000. 

After showcasing operating revenues, you need to showcase Gross Profit. The Gross Profit is nothing but the difference between Net Sales and COGS. The COGS is calculated using the following formula:

COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock

Let’s say your eCommerce business had opening stock worth US$ 100,000, purchases worth US$ 180,000, direct expenses worth US$ 150,000, and closing stock worth US$ 100,000. Thus, you had a Cost Of Sales worth US$ 330,000.

Thus, your Gross Profit for the accounting period was US$ 164,000 (Net Sales – COGS = US$ 494,000 – US$ 330,000).

After showcasing Gross Profit, the next item that you have to showcase in your multi-step income statement is operating expenses. Your operating expenses for the current account period included selling expenses worth US$ 20,500 and general and administrative expenses worth US$ 30,000. Thus, your total operating expenses for the year were US$ 50,500.

The next line item after Gross Profit in your multi-step income statement is operating income. Operating Income is nothing but the difference between the Gross Profit and Operating Expenses of your eCommerce business. Accordingly, the Operating Income of your business for the current accounting period was US$ 113,500 (US$ 164,000 – US$ 50,500).

After operating income, the next line item in a multi-step income statement is Non-Operating items. Your Non-Operating Items had Other Revenues and Gains of US$ 500 and Other Expenses and Losses of US$ 1,500. Thus, the Net Non-Operating Items of your eCommerce business for the accounting period were US$ (1,000). (US$ 500 – US$ 1,500)

The final item in the multi-step income statement is Net Income/Net Loss. The Net Income/Net Loss is the sum of income from net non-operating items and operating items. Accordingly, the Net Income/Net Loss of your business for the current accounting period stands at US$ 112,500.

5. Pro Forma Income Statement

A Pro Forma Income Statement is a financial statement that presents the projected or anticipated financial results of your business under specific circumstances or hypothetical scenarios. Unlike historical financial statements, which report actual results, pro forma statements are forward-looking and are typically used for planning, forecasting, and decision-making purposes. The term “pro forma” is Latin and translates to “for the sake of form” or “as a matter of form.”

The primary purpose of a pro forma income statement is to project future financial performance of your business. It serves as a tool for forecasting revenue, expenses, and profits of your business based on certain assumptions and scenarios. Needless to say, a Pro Forma Income Statement plays a crucial role in scenario analysis as it provides a structured and forward-looking framework to model and assess the potential financial outcomes of different scenarios.

Scenario analysis involves evaluating the impact of various factors, events, or changes in assumptions on your business’s financial performance. It begins with altering key assumptions such as sales growth, pricing strategies, cost structures, market conditions, or other relevant variables. Once you alter the key assumptions, you can then adjust revenue and expense variables based on these assumptions and model different scenarios. These scenarios may include best-case, worst-case, and likely-case scenarios that will help you in assessing a range of potential outcomes.

Additionally, a pro forma income statement helps you quantify the impact of changes in assumptions on revenues. For example, you as an e-commerce business can project how different sales growth rates or changes in pricing may affect total sales revenue and individual product or service revenues.

The structure of a Pro Forma Income Statement typically includes the following main sections:

Income Statement For eCommerce Business

6. Common Size Statements

A business’s Common Size Income Statements indicate the relationship of different income or expense items with a common item like sales. Further, the relationship of each income or expense item with a common item is represented as a percentage of that common item.

The percentages thus calculated for the current year can be easily compared with the percentages of the corresponding items in the previous year. 

The percentages of income or expense items for a given period can be compared with the corresponding percentage items for a different firm for the same period. Such a comparison is possible as the income or expense amounts are reduced to a common base. 

This means the financial analysts of a business can compare the operating and financing attributes of two companies of different sizes in the same industry.

Thus, the common size income statements help the financial managers perform intra-firm comparisons over different years and inter-firm comparisons for the same year or several years. Since the percentages are calculated vertically, this is called ‘Vertical analysis.’

The formula for calculating common size percentages is as follows:

Common Size Percentage = (Line Item Amount/Base Figure) ×100

The structure of a Common Size Income Statement typically includes the following main sections:

Income Statement For eCommerce Business

Common Size Income Statement Example

The following is the common-size income statement of Amazon Inc. to help you understand the format of the common-size income statement.

12 months ended:

Dec 31, 2023

Dec 31, 2022

Dec 31, 2021

Dec 31, 2020

Net product sales

44.52%

47.26%

51.46%

55.93%

Net service sales

55.48%

52.74%

48.54%

44.07%

Net sales

100.00%

100.00%

100.00%

100.00%

Cost of sales

–53.02%

–56.19%

–57.97%

–60.43%

Gross profit

46.98%

43.81%

42.03%

39.57%

Fulfillment

–15.77%

–16.40%

–15.99%

–15.16%

Technology and infrastructure

–14.90%

–14.24%

–11.93%

–11.07%

Sales and marketing

–7.72%

–8.22%

–6.93%

–5.70%

General and administrative

–2.06%

–2.31%

–1.88%

–1.73%

Other operating income (expense), net

–0.13%

–0.25%

–0.01%

0.02%

Operating income

6.41%

2.38%

5.30%

5.93%

Interest income

0.51%

0.19%

0.10%

0.14%

Interest expense

–0.55%

–0.46%

–0.39%

–0.43%

Marketable equity securities valuation gains (losses)

0.17%

–2.70%

2.45%

0.14%

Equity warrant valuation gains (losses)

–0.41%

0.28%

0.40%

Upward adjustments relating to equity investments in private companies

0.01%

0.01%

0.40%

0.09%

Foreign currency gains (losses)

0.01%

–0.07%

–0.01%

0.01%

Other, net

–0.03%

–0.11%

–0.02%

Other income (expense), net

0.16%

–3.27%

3.11%

0.61%

Non-operating income (expense)

0.12%

–3.54%

2.82%

0.33%

Income (loss) before income taxes

6.53%

–1.15%

8.12%

6.26%

(Provision) benefit for income taxes

–1.24%

0.63%

–1.02%

–0.74%

Equity-method investment activity, net of tax

Net income (loss)

5.29%

–0.53%

7.10%

5.53%

Note that Amazon used the formula Common Size Percentage = (Line Item Amount/Base Figure) ×100 to calculate the percentage figures for each of the line items of the income statement. As we can see, out of the total sales that Amazon generated as of December 31, 2020, the sales generated from products was 55.93% and the remaining 44.07% of the sales were generated from services.

Likewise, out of the sales revenue, the gross profit for the accounting period was 39.57% and the remaining 60.43% was the cost of sales. Then out of the gross profit of 39.57%, the operating income was 5.93%. Then, income before income taxes was 6.26% and finally, net income (loss) was 5.53%.

Now besides using the different types of income statements to undertake an analysis of revenues and expenses of your business, you can also use tools like income statement ratio analysis.

Income Statement Ratio Analysis

Ratio analysis is another financial tool that helps you as an eCommerce business to analyze the financial data represented in the income statement of your business. It describes the significant relationship between various items of the balance sheet and a statement of profit and loss of your business. 

In other words, the accounting ratios measure the comparative importance of the individual items of the income statement and balance sheet. Such an analysis helps you to assess the profitability, solvency, and efficiency of your business.

For instance, as an e-commerce business, you can calculate profitability ratios. These ratios help you to determine your business’s ability to generate profits as against Sales, Operating Costs, Assets, and Shareholder’s Equity. Such ratios reveal how well you as a business use its assets to generate profitability and create shareholder value.

The following are some important profitability margin ratios that you can determine as an e-commerce business.

(a) Gross Profit Margin

Gross Profit Margin measures the Gross Profit against the sales revenue of your business. This margin demonstrates your business’s earnings after considering the costs incurred to produce goods and services. 

The higher your business’s Gross Profit Margin ratio, the higher its efficiency in carrying out its operations. This means higher gross profits for your business to cover its operating expenses, fixed expenses, dividends, and depreciation. Also, high gross profit results in increased net earnings for your business. 

Likewise, a low Gross Profit margin indicates a higher cost of goods sold for your business. The higher Cost of Goods Sold (COGS) can be due to lower sales, lower selling prices, lower COGS, market competition, etc. 

The formula for Gross Profit Margin is:

Gross Profit Margin = Gross Profit/Revenue

(b) Operating Profit Margin

The operating Profit Margin is calculated by determining the Operating profit. Operating Profit is determined by subtracting operating costs from your business’s gross profit. Then Operating Profit Margin is calculated by dividing operating profit by Net Sales.

If the operating profit margin increases faster than the Gross Profit Margin, this means that you as a business efficiently control the operating costs. Thus revealing the quality of your decision-making. 

On the other hand, a lower operating profit margin reveals the inability of your business to regulate its operating costs. 

Following is the formula for Operating Profit Margin:

Operating Profit Margin = Operating Profit/Revenue

(c) Pre-Tax Margin

Pre-Tax Profit Margin must be calculated to determine Pre-Tax Income or Earning Before Tax (EBT). EBT refers to the operating profit less interest. Thus, the Pre-Tax Profit Margin is the ratio of Pre-Tax Income to Revenue.

The pre-tax Profit Margin ratio showcases the impact of non-operating income, expenses, and interest on your business’s profitability. A high Pre-Tax Profit Margin ratio could result from increasing the non-operating income of your business. 

Following is the formula for the Pre-Tax Margin Ratio:

Pre-tax margin = Earnings Before Tax But After Interest (EBT)/Revenue

(d) Net Profit Margin

Net Profit Margin is the percentage of profit your business generates from its revenues. This ratio showcases the net profit amount your business can generate for every unit of increase in revenue. Thus, the Net Profit Margin ratio links revenue from operations to the net profit of your business. Note that net profit is calculated after considering all the operating and non-operating incomes and expenses of your business.

Following is the formula for Net Profit Margin:

Net Profit Margin = Net Income/Revenue

The following table showcases the liquidity and solvency ratios of Amazon Inc that will help analyze its financial performance over the years.

Period Ending: 12/31/2020 12/31/2019 12/31/2018 12/31/2017
Liquidity Ratios        
Current Ratio 105% 110% 110% 104%
Quick Ratio 86% 86% 85% 76%
Cash Ratio 67% 63% 60% 54%
Profitability Ratios        
Gross Margin 40% 41% 40% 37%
Operating Margin 6% 5% 5% 2%
Pre-Tax Margin 6% 5% 5% 2%
Profit Margin 6% 4% 4% 2%
Pre-Tax ROE 26% 23% 26% 14%
After-Tax ROE 23% 19% 23% 11%

Source: Nasdaq

<h2id=”Income_Statement_Trend_Analysis”>Income Statement Trend Analysis

In addition to using income statement ratio analysis, you can also use income statement trend analysis This is another technique that you can use as an e-commerce business to study the operational results and financial position over several years. For instance, you can use previous years’ data and analyze the trends in the different income statements and balance sheet items by calculating percentage changes.

The trend percentage is the relationship in which each item of different years bears the same item in the base year. The trend analysis is important as it gives a long-run view of your e-commerce business’ key financials. Plus, it may also point towards the basic changes like your business.

Thus, as a business, you can analyze whether a ratio is falling, rising, or remaining relatively constant by looking at a trend in a particular ratio. From such an observation, you can detect problems and opportunities.

Recognition Of Income

Like any other business, an e-commerce business needs to be recognized in the income statement. It is done when an increase in future economic benefits related to an increase in an asset or a decrease in liability has arisen. Further, it should be possible for the business to measure income reliably. This means a business must recognize income simultaneously with recognizing asset increases or liability decreases.

For example, the net increase in assets arising from a sale of goods or services or the decrease in liabilities arising from waiving a debt payable.

Note that to recognize income, the revenue should be earned. Further, such income can be measured reliably and has a sufficient degree of certainty.

Recognition Of Expense

An e-commerce business, like any other business, must recognize expenses in the income statement. This must be done when a decrease in future economic benefits related to a decrease in an asset or an increase in liability has arisen. Further, the business can measure such expenses reliably. 

Thus, an e-commerce business must recognize expenses simultaneously with recognizing an increase in liabilities or a decrease in assets— for example, the accrual of employees’ salaries or the depreciation of plant and machinery.

Note that many expenses are recognized in the profit and loss statement based on a direct connection between the costs incurred and the earnings of specific income items. 

Such a process is called the matching of costs with revenues.  t involves simultaneous or combined recognition of revenues and expenses resulting directly or jointly from the same transactions or other events.

For example, the expenses forming a part of the cost of goods sold are recognized simultaneously as the income derived from the sale. 

Then, there are cases when the economic benefits from expenses are expected to arise over several accounting periods.  Furthermore, the association of expenses with income can only be broadly or indirectly determined.  n such scenarios, the income statement must recognize the expenses based on systematic and rational allocation procedures. 

This is often necessary for recognizing expenses associated with utilizing assets like plant and machinery, goodwill, patents, and trademarks. The expense in such cases is called depreciation or amortization. 

Remember, such allocation procedures recognize expenses when the associated economic benefits are consumed or expire in the accounting periods.

Want Help With eCommerce Tax And Accounting?

Alan Chen Freecashflow.io

Book A Call Now

Free E-book for E-Commerce Entrepreneurs

9 Most Crucial eCOM Tax Deducations The IRS Doesn’t Want You to Know

Explore More

How To File Taxes For Shopify Store?
Blog

How To File Taxes For Shopify Store?

How To File Taxes For Shopify Store? In this article, you will learn: Shopify Taxes Shopify Store Owners Need To Pay Shopify Income Tax: Forms,

Boost Your E-Commerce Business Now

drop us a line and keep in touch
Alan Chen

Schedule Your Call with Alan!

Hate working with accountants that don’t understand your online business?

By the end of this Strategy Session, you will have a clear understanding of the next steps you can take.

 This Call Is Completely FREE.

Have Urgent Questions You Need Answered?

Book a FREE consultation call with Alan and talk to a CPA who actually understands and cares for your business.

Alan Chen