Monthly income statement in 4 steps
After reviewing the adjusted trial balance you have balances you trust. The monthly income statement turns them into one answer: how much did you make this month, and where from? Prepare it from the trial balance in 4 steps: take only revenue and expense accounts, arrange them into profit levels, calculate ratios against last month, then reconcile net profit to the trial balance before you lock the month.
Example: a caterer's September income statement
We stay with the same caterer. September's adjusted trial balance agrees, with these revenue and expense accounts: banquet sales SAR 186,000, event services SAR 24,000, sales discounts SAR 2,000, food ingredients SAR 78,000, kitchen wages SAR 32,000, admin salaries SAR 28,000, rent SAR 15,000, power and water SAR 6,400, maintenance SAR 1,100, depreciation SAR 4,200, delivery fuel SAR 5,300, marketing SAR 2,000, sundry expenses SAR 6,000 and bank charges SAR 400.
Step 1: take only revenue and expense accounts
A trial balance holds two kinds of account. Revenue and expenses go to the income statement; assets, liabilities and equity go to the statement of financial position. The common mistake is letting in what does not belong:
| Item | Where it belongs |
|---|---|
| VAT accounts | Financial position: amounts owed to or by you, not revenue or expense |
| Owner's personal drawings | Equity, not expenses |
| Loan principal repaid | A cut in the liability; only the finance cost is an expense |
| An asset that serves for years | Fixed assets; only its monthly depreciation enters the statement |
In September the accountant found that "sundry expenses SAR 6,000" was a transfer to the owner's personal account, so it moved to owner's drawings and left the statement.
Step 2: arrange them into profit levels
Do not show one long list. Arrange the accounts so the owner reads three profits, each answering a different question:
| Line | September (SAR) |
|---|---|
| Revenue (186,000 + 24,000 − 2,000 discounts) | 208,000 |
| Cost of revenue (ingredients 78,000 + kitchen wages 32,000) | 110,000 |
| Gross profit | 98,000 |
| Operating expenses (salaries, rent, power, maintenance, depreciation, fuel, marketing) | 62,000 |
| Operating profit | 36,000 |
| Bank charges | 400 |
| Net profit | 35,600 |
Gross profit tells you whether your prices cover what you sell, operating profit whether the business carries its fixed costs, and net profit what is actually left.
Step 3: calculate ratios and compare with last month
A figure alone says little, so divide each level by revenue: gross margin 98,000 ÷ 208,000 = 47.1%, net margin 17.1%. Then set August beside it. In August ingredients were SAR 69,580 on revenue of SAR 196,000, or 35.5%; in September SAR 78,000, or 37.5%. Sales rose, but each riyal of sales now costs more ingredients: a question for purchasing or pricing.
Step 4: reconcile net profit to the trial balance, then approve
Add the revenue balances in the trial balance and subtract the expense balances. The result must equal the statement's net profit to the riyal; any gap means an account was dropped or counted twice. Once they agree, approve the statement and lock the month, then compare it with your plan in actual vs budget.
Running it from WhatsApp
Owner (1 October): How much did we make in September?
System: Draft September income statement: revenue SAR 208,000, gross profit SAR 98,000 (47.1%), net profit SAR 29,600. Two notes: "sundry expenses" of SAR 6,000 has no invoice and is a transfer to an account in your name. And ingredients are 37.5% of revenue against 35.5% in August.
Owner: The transfer was a personal withdrawal
System: Moved to owner's drawings. September's net profit is now SAR 35,600 (17.1%), matching revenue less expenses in the trial balance. Approve the statement?
Owner: Approve, and send me this month's top 3 ingredient suppliers
The withdrawal did not change the cash in the bank, but it changed the profit your decisions rest on. More on Arabic accounting from your phone.
Checklist before you approve
- Did you prepare it from the adjusted trial balance, not the unadjusted one?
- Are VAT, owner's drawings, loan principal and asset purchases left out?
- Does it show three profits: gross, operating and net?
- Did you compare each ratio with last month and explain any jump?
- Does net profit equal revenue less expenses in the trial balance?