Income Statements in the Music Business

This post on income statements is part of our Music Biz MBA blog series.

An income statement, also commonly referred to as a profit & loss or P&L statement, reports how much money a band or artist makes (or loses) during a specific period of time. The period of time for income statement reporting can be a month, a quarter or even for the duration of a tour.

Cash vs. Accrual Accounting

The first step of creating an income statement (and initially setting up your accounting process / system) is to determine whether it is preferable to track your revenue and expenses on a cash or accrual basis.

Cash basis accounting means recording revenue when it is received and expenses when they are paid. Accrual basis accounting means recording revenue when it is earned and expenses when they are incurred.  Cash basis accounting is the more simple (and often preferred) method for small business accounting. In this blog post our examples will be for a cash basis company.

Revenue

Capturing revenue information for the reporting period is the first piece of information needed to create an income statement. Collect the details and totals on all the sources of revenue including ticket sales, show guarantees, merchandise sales, publishing royalties, public performance royalties, digital royalties and any other sources that produce revenue during the given period.

Expenses

The expenses for the reporting period can be broken down into two categories, cost of goods sold and general expenses. Cost of goods sold (or COGS) expenses are most often associated with goods that are produced for sale. T-shirts are a typical COGS expense in the music industry.

General expenses would be pretty much all the other expenses paid during the reporting period. General expenses often include expenses like gas, hotels, instrument repair and studio time.

Basic Income Statement Calculations

You can now use the revenue and expense information you’ve collected to produce a basic income statement. The formula for a basic income statement is:

Revenue – Expenses = Net Profit (or Loss)

Gross Profit

Many income statements will include an additional calculation called gross profit. Gross profit is calculated by subtracting the total cost of goods sold (COGS) from the total revenue for the reporting period.

Revenue – COGS = Gross Profit

Typical Income Statement Format

Income statements can vary greatly by industry and preparer but most follow a format similar to the example below:

Income Statements in the Music Business

During my research for this post I discovered that many bands and musicians create and manage two separate income statements, one for touring and one for publishing. It’s fairly common for bands to have two different corporate entities (we’ll cover Sole Proprietor, LLC, S-Corp and C-Corps in another post) altogether. Again, one corporate entity for touring and one for publishing.

Below are a couple of sample income statements for a band.

Touring Income Statement Example

Publishing Income Statement Example

Like in all businesses it’s important to know if you are making (or losing) money in the music business. Not only will you need to know if you are making money during a given reporting period but you will ultimately need to know if you will be reporting a net profit or loss at the end of the year for tax purposes.

It can be easy to get overwhelmed with all the jargon associated with accounting. Just remember the basic income statement is always: revenue – expenses = net profit (or loss). And understanding how to create and use an income statement is a great starting point for managing your music business career.