Income Statement: Format, Components, Types, and How to Create One in India
Quick Summary
- An income statement, also called a Profit and Loss Statement or P&L, shows a business’s revenue, expenses, and profit or loss for a specific period.
- Common presentation formats include single-step, multi-step, comparative, and common-size income statements.
- For Indian companies, the statutory term under Schedule III is Statement of Profit and Loss.
- Schedule III has three divisions: Division I for companies following Accounting Standards, Division II for companies following Ind AS, and Division III for NBFCs following Ind AS. Schedule III separately presents revenue from operations, other income, total income, and expenses.
- Gross profit, EBIT, EBITDA, and margin ratios are useful for business analysis, but they are management or analytical measures. The statutory format must still follow Schedule III where applicable.
What Is an Income Statement?
An income statement is a financial report that shows how much a business earned, how much it spent, and the resulting profit or loss over a specific period. It covers a period such as a month, quarter, or financial year. This makes it different from the balance sheet, which shows financial position on a specific date.
Basic income statement equation:
Net Income = Total Revenue - Total Expenses
For example, if a business earns ₹60,00,000 in revenue and incurs ₹40,00,000 in total expenses, its net income is ₹20,00,000.
Note: An income statement is also called a Profit and Loss Statement, P&L Statement, Statement of Profit and Loss, Statement of Operations, Statement of Financial Performance, or Trading and Profit and Loss Account. In Indian company reporting, the official Schedule III term is the "Statement of Profit and Loss".
Book A Demo
| Term | Common Usage |
|---|---|
| Income Statement | Global and corporate usage |
| Profit and Loss Statement | Small business and management reporting |
| Statement of Profit and Loss | Companies Act and Schedule III terminology |
| Trading and Profit and Loss Account | Traditional Indian bookkeeping |
The purpose remains the same: to show revenue, expenses, and profit or loss for a specific period.
Who Uses an Income Statement and Why?
- Business owners use the income statement to check whether sales are rising, expenses are under control, and profit margins are improving.
- Investors use it to review earnings growth, gross margin, operating profit, net profit, and earnings per share.
- Banks and lenders use it to judge repayment ability, operating stability, and debt-service capacity.
- Auditors use it to verify revenue recognition, expense classification, provisions, depreciation, and compliance with accounting standards.
- Tax authorities use it to review taxable income, deductions, and tax liability.
- Suppliers and creditors use it to understand whether the business is financially stable enough to pay on time.
Essential Components of an Income Statement
Revenue from Operations
Revenue from operations is income earned from the main business activity. It may include sale of goods, sale of services, subscription income, professional fees, manufacturing sales, project billing, or trading sales.
Revenue should be shown net of sales returns, trade discounts, and GST collected. GST collected from customers is a statutory liability payable to the government. It is not business income.
Other Income
Other income includes income not arising from the main business activity. Examples include interest income, dividend income, rental income, foreign exchange gains, and profits on the sale of assets.
Schedule III separates revenue from operations and other income in the Statement of Profit and Loss.
Cost of Goods Sold or Cost of Revenue
For a trading business, the cost of goods sold usually includes opening stock, purchases, direct purchase expenses, and closing stock adjustment.
For a manufacturing business, it includes raw material consumed, direct labor, factory overheads, and production-related costs.
For a service business, it may be called the cost of services or the cost of revenue. It includes direct staff costs, subcontractor costs, project delivery costs, hosting costs, and other costs directly linked to service delivery.
Gross Profit
Gross profit shows the profit left after deducting direct costs from revenue from operations. Gross Profit = Revenue from Operations - Cost of Goods Sold
This is a management metric. It helps a business understand whether pricing, procurement, production, or service delivery is efficient.
Operating Expenses
Operating expenses are the indirect costs required to run the business. These include office salaries, rent, utilities, marketing, sales commission, software subscriptions, insurance, audit fees, administrative expenses, depreciation, and amortization.
Operating Profit or EBIT
Operating profit, also called EBIT, shows profit from business operations before finance cost and tax.
EBIT = Gross Profit - Operating Expenses
EBIT is useful for internal analysis, lender review, and investor analysis. However, it should be reconciled with statutory accounts.
Finance Costs
Finance costs include interest on loans, overdrafts, debentures, lease liabilities, and other borrowings. Schedule III requires finance costs to be presented separately under expenses.
Profit Before Tax
Profit before tax shows profit after operating income, other income, and finance costs, but before tax expense.
PBT = EBIT + Other Income - Finance Costs
Tax Expense
Tax expense includes current tax and deferred tax. For companies, tax treatment depends on the Income Tax Act, chosen tax regime, accounting standards, and deferred tax rules.
Net Profit or Profit After Tax
Net profit, also called PAT, is the final profit after all expenses, finance costs, and tax.
PAT = PBT - Tax Expense
This amount is transferred to reserves and surplus or retained earnings, subject to applicable company law and accounting treatment.
Earnings Per Share
EPS is relevant for companies with share capital. It shows the profit attributable to each equity share. Basic and diluted EPS may be required where applicable.
Common Income Statement Formats
Income statements can be prepared in different formats depending on the size of the business, reporting purpose, and level of analysis required. The four most useful formats are single-step, multi-step, comparative, and common-size income statements.
For statutory reporting, Indian companies must follow Schedule III of the Companies Act, 2013. For internal review, businesses may prepare a more detailed management P&L showing gross profit, EBIT, EBITDA, branch-wise profit, product-wise margin, and cost-center analysis.
Single-Step Income Statement
A single-step income statement groups all income together and deducts all expenses in one step.
Net Income = Total Income - Total Expenses
This format is simple and useful for small businesses, freelancers, consultants, and firms with limited transaction complexity.
Multi-Step Income Statement
A multi-step income statement shows profit in stages. It separates gross profit, operating profit, profit before tax, and profit after tax.
The usual flow is:
Revenue from operations minus cost of goods sold gives gross profit. Gross profit minus operating expenses gives operating profit or EBIT. EBIT plus other income minus finance costs gives profit before tax. Profit before tax minus tax expense gives profit after tax.
This format is better for manufacturers, traders, growing businesses, and companies that need to track margins closely.
Comparative Income Statement
A comparative income statement shows two or more periods side by side. It helps identify whether revenue, cost, and profit are improving or deteriorating.
| Line Item | FY 2024-25 | FY 2025-26 | Change | Change % |
|---|---|---|---|---|
| Revenue | ₹45,00,000 | ₹52,00,000 | ₹7,00,000 | 15.6% |
| COGS | ₹27,00,000 | ₹30,00,000 | ₹3,00,000 | 11.1% |
| Gross Profit | ₹18,00,000 | ₹22,00,000 | ₹4,00,000 | 22.2% |
| Net Profit | ₹7,50,000 | ₹9,00,000 | ₹1,50,000 | 20.0% |
This format is useful for board reviews, investor reporting, lender submissions, audits, and annual business planning.
Common-Size Income Statement
A common-size income statement shows each line item as a % of revenue. This makes it easier to compare cost structure across years or across businesses of different sizes.
| Line Item | Amount | % of Revenue |
|---|---|---|
| Revenue | ₹52,00,000 | 100.0% |
| COGS | ₹30,00,000 | 57.7% |
| Gross Profit | ₹22,00,000 | 42.3% |
| Operating Expenses | ₹9,00,000 | 17.3% |
| Operating Profit | ₹13,00,000 | 25.0% |
| Net Profit | ₹9,00,000 | 17.3% |
Income Statement for Different Business Types
Trading Business
A trading business buys and sells goods. Its income statement should clearly show sales, purchases, opening stock, closing stock, direct expenses, gross profit, operating expenses, and net profit.
COGS is usually calculated as: Opening Stock + Purchases + Direct Expenses - Closing Stock
The main focus is gross margin, stock movement, purchase cost, discount leakage, and inventory turnover .
Manufacturing Business
A manufacturing business converts raw material into finished goods. Its income statement should track raw material consumed, direct labor, factory overhead, work-in-progress, finished goods, production cost, and gross profit.
The main focus is cost per unit, wastage, production efficiency, capacity utilization, and product-wise margin.
Service Business
A service business earns income from professional work, subscriptions, retainers, project billing, consulting, AMC, or support services.
There may be no physical inventory, but there can still be direct service costs. Examples include delivery team salaries, consultant fees, hosting costs, contractor costs, and project-specific tools. The main focus is billable utilization, revenue per employee, project margin, recurring revenue, and collection efficiency.
Mixed Revenue Business
Many modern businesses earn income from products, services, AMC, support, installation, and subscriptions. These businesses should separate revenue streams and direct costs to understand which segment is actually profitable.
For example, a software company may earn license revenue, implementation charges, AMC, support income, and training fees. If all revenue is grouped together, management may not know whether profit is coming from product sales, services, or renewals.
India Compliance: Schedule III, AS, Ind AS and 2026 Updates
Schedule III of the Companies Act, 2013
Companies registered under the Companies Act, 2013 must prepare financial statements in accordance with Section 129 and Schedule III, subject to applicable accounting standards.
Schedule III has three divisions:
| Division | Applies To | Accounting Framework |
|---|---|---|
| Division I | Companies following Accounting Standards | AS framework |
| Division II | Companies following Ind AS | Indian Accounting Standards |
| Division III | NBFCs following Ind AS | Ind AS with NBFC-specific presentation |
Schedule III Part II prescribes the format for the Statement of Profit and Loss. It includes revenue from operations, other income, total income, expenses, tax expense, profit or loss, and EPS-related presentation where applicable.
AS Companies
Companies that do not fall under Ind AS generally follow Accounting Standards under the Companies (Accounting Standards) Rules. Their statutory presentation still has to align with Schedule III Division I, where applicable.
Revenue recognition under the AS framework is generally guided by AS 9, with other applicable standards and guidance depending on the transaction type.
AS 22 Update (2026)
MCA notified the Companies (Accounting Standards) Amendment Rules, 2026 on March 10, 2026. The amendment updates AS 22 for Pillar Two income taxes.
Under this amendment, enterprises are not required to recognize or disclose deferred tax assets and deferred tax liabilities related to Pillar Two income taxes. However, affected enterprises need to make specific disclosures about the application of this exception, current tax expense or income related to Pillar Two taxes, and potential exposure where Pillar Two legislation has been enacted or substantively enacted but is not yet effective.
This update is mainly relevant for larger multinational groups and companies affected by global minimum tax rules. For most small Indian businesses, it will not change normal income statement preparation.
Ind AS Companies
Ind AS applies to prescribed companies under the Companies (Indian Accounting Standards) Rules, 2015. Broadly, Ind AS is mandatory for covered listed companies or companies in the process of listing, except companies listed only on SME exchanges, and for unlisted companies that meet the prescribed net-worth thresholds. It also applies to the holding, subsidiary, joint venture, or associate companies of covered companies.
An Indian company that is a subsidiary, associate, joint venture, or similar entity of a foreign company does not automatically follow Ind AS only because of foreign ownership. It follows Ind AS if it voluntarily adopts Ind AS or mandatorily meets the prescribed Ind AS applicability criteria.
Key Differences Between AS and Ind AS
| Area | AS Framework | Ind AS Framework |
|---|---|---|
| Revenue recognition | AS 9 and other applicable standards | Ind AS 115 |
| Extraordinary items | Covered under AS 5 | Not permitted under Ind AS 1 |
| Leases | Operating lease expense model may apply | Lessee generally recognises right-of-use asset and lease liability, subject to exceptions |
| Depreciation | Schedule II and applicable AS, including component accounting where applicable | Ind AS 16 with component accounting |
| EPS | Basic and diluted EPS, where applicable | Basic and diluted EPS, where applicable |
| Presentation | Schedule III Division I | Schedule III Division II |
Domestic Company Tax Rates for AY 2026-27
For AY 2026-27, domestic company tax rates are broadly as follows:
| Case | Base Tax Rate |
|---|---|
| Domestic company whose total turnover or gross receipts in FY 2023-24 do not exceed ₹400 crore | 25% |
| Any other domestic company under normal provisions | 30% |
| Company opting for Section 115BAA | 22% |
| Eligible company opting for Section 115BAB | 15% for business income and 22% for other income |
The Finance Bill, 2026 , states that for a domestic company, 25% applies where the total turnover or gross receipts in the previous year, 2023-24, do not exceed ₹400 crore, and 30% applies in other normal cases. The Income Tax Department also lists 115BAA at 22% and 115BAB at 15% for business income and 22% for other than business income for AY 2026-27. Surcharge, health, and education cess apply separately. Health and education cess is 4% on income tax plus surcharge, where applicable.
Fact Box: Tax in the Income Statement
Tax expense in the income statement is not always the same as tax payable as per the income tax return. Accounting profit and taxable income can differ because of depreciation, disallowances, provisions, timing differences, brought-forward losses, MAT, and deferred tax .
For management review, businesses may estimate tax using the applicable base rate. For statutory reporting and return filing, tax should be calculated under the Income Tax Act with surcharge, cess, and applicable adjustments.
How to Prepare an Income Statement
Step 1: Choose the Reporting Period
Decide whether the income statement is monthly, quarterly, or annual. Indian companies generally prepare annual financial statements for the financial year ending March 31.
For internal control, preparing the monthly P&L is better because it helps identify cost overruns, slow sales, and margin leakage early.
Step 2: Collect Revenue Data
Collect sales invoices, service invoices, credit notes, debit notes, recurring billing records, and other revenue data. Separate revenue from operations from other income.
For example, product sales and service fees should be shown under operating revenue, while bank interest should be shown as other income.
Step 3: Remove GST from Revenue
Do not include GST collected from customers as revenue. GST is collected on behalf of the government and should be recorded as a liability until paid or adjusted.
For example, if an invoice is ₹1,18,000 including 18% GST, revenue is ₹1,00,000 and output GST liability is ₹18,000.
Step 4: Calculate Direct Cost
For trading, calculate COGS using opening stock, purchases, direct expenses, and closing stock. For manufacturing, include raw material consumed, direct labour, factory overhead, and production-related costs. For services, include direct delivery cost, subcontractor cost, project staff cost, and other service delivery costs.
Step 5: Calculate Gross Profit
Gross profit shows whether the business is earning enough after direct cost.
Gross Profit = Revenue from Operations - Direct Cost
A falling gross profit margin may indicate higher purchase cost, discounting, wastage, wrong pricing, or poor product mix.
Step 6: Classify Operating Expenses
Group expenses into selling expenses, administrative expenses, employee cost, depreciation, amortization, rent, marketing, software, professional fees, and office overheads.
Interest should not be mixed with operating expenses. It should be shown separately as a finance cost.
Step 7: Calculate Operating Profit
Operating profit shows business performance before finance cost and tax. This helps you understand whether the business model is profitable before debt and tax effects.
EBIT = Gross Profit - Operating Expenses
Step 8: Add Other Income and Deduct Finance Cost
Add interest income, rental income, dividend income, and other non-operating income. Deduct interest and other borrowing costs.
This separation is important because a business should not appear operationally strong only because it earned one-time non-operating income.
Step 9: Calculate Profit Before Tax
PBT = EBIT + Other Income - Finance Costs
PBT shows profit before current tax and deferred tax.
Step 10: Deduct Current and Deferred Tax
Apply current tax and deferred tax accounting as per applicable law and accounting standards.
Do not calculate final tax only by multiplying accounting profit with a flat tax rate. Taxable income may differ from accounting profit.
Step 11: Calculate Profit After Tax
PAT = PBT - Total Tax Expense
PAT is the final profit after all expenses, finance costs, and tax.
Step 12: Reconcile with Balance Sheet and Cash Flow
Net profit should connect with retained earnings in the balance sheet. It also becomes the starting point for cash flow from operations under the indirect method.
If profit is positive but cash is tight, check receivables, inventory, payables, loan repayments, and capital expenditure.
Sample Multi-Step Income Statement
Management Format - FY 2025-26
| Particulars | Amount |
|---|---|
| Sales Revenue | ₹50,00,000 |
| Less: Returns and Discounts | (₹1,00,000) |
| Net Revenue from Operations | ₹49,00,000 |
| Less: Cost of Goods Sold | (₹28,00,000) |
| Gross Profit | ₹21,00,000 |
| Selling and Distribution Expenses | (₹3,00,000) |
| Administrative Expenses | (₹4,50,000) |
| Depreciation and Amortization | (₹1,50,000) |
| Total Operating Expenses | (₹9,00,000) |
| Operating Profit / EBIT | ₹12,00,000 |
| Interest Income | ₹80,000 |
| Rental Income | ₹1,20,000 |
| Total Other Income | ₹2,00,000 |
| Less: Finance Costs | (₹1,00,000) |
| Profit Before Tax | ₹13,00,000 |
| Current Tax Expense | (₹3,25,000) |
| Deferred Tax Expense | (₹25,000) |
| Total Tax Expense | (₹3,50,000) |
| Profit After Tax | ₹9,50,000 |
| Basic EPS, assuming 10,000 shares | ₹95.00 |
This is a management-style format. A company’s statutory financial statement should be mapped to Schedule III headings and applicable accounting standards.
Sample Single-Step Income Statement
| Particulars | Amount |
|---|---|
| Sales Revenue | ₹18,00,000 |
| Other Income | ₹50,000 |
| Total Income | ₹18,50,000 |
| Purchases / COGS | (₹10,00,000) |
| Rent | (₹1,20,000) |
| Salaries | (₹2,40,000) |
| Utilities | (₹30,000) |
| Depreciation | (₹60,000) |
| Interest | (₹40,000) |
| Total Expenses | (₹14,90,000) |
| Profit Before Tax | ₹3,60,000 |
| Income Tax | (₹90,000) |
| Net Profit | ₹2,70,000 |
This format is simple, but it does not show gross margin or operating profit separately.
Key Ratios Derived from the Income Statement
Gross Profit Margin
Gross Profit Margin = Gross Profit / Net Revenue from Operations x 100
Using the corrected sample:
₹21,00,000 / ₹49,00,000 x 100 = 42.9%
This shows how much profit remains after direct cost.
Operating Profit Margin
Operating Profit Margin = EBIT / Net Revenue from Operations x 100
₹12,00,000 / ₹49,00,000 x 100 = 24.5%
This shows profitability from operations before finance cost and tax.
Net Profit Margin
Net Profit Margin = PAT / Net Revenue from Operations x 100
₹9,50,000 / ₹49,00,000 x 100 = 19.4%
This shows how much final profit remains from every rupee of operating revenue.
EBITDA and EBITDA Margin
EBITDA = EBIT + Depreciation + Amortization
₹12,00,000 + ₹1,50,000 = ₹13,50,000
EBITDA Margin = EBITDA / Net Revenue from Operations x 100
₹13,50,000 / ₹49,00,000 x 100 = 27.6%
EBITDA is useful for comparing operating performance before depreciation, amortization, finance cost, and tax. However, it should not be treated as cash profit. It does not capture working capital blockage, loan repayment, capital expenditure , or tax payment.
Ratio Quick Reference
| Ratio | Formula | What It Shows |
|---|---|---|
| Gross Profit Margin | Gross Profit / Revenue x 100 | Direct cost efficiency |
| Operating Margin | EBIT / Revenue x 100 | Operating profitability |
| Net Profit Margin | PAT / Revenue x 100 | Final profitability |
| EBITDA Margin | EBITDA / Revenue x 100 | Operating performance before D&A |
| Cost of Revenue % | COGS / Revenue x 100 | Direct cost burden |
| Opex Ratio | Operating Expenses / Revenue x 100 | Overhead control |
Use industry-specific benchmarks. A universal gross margin range is unreliable because margins vary by sector, business model, pricing power, inventory cycle, and accounting policy.
How to Read and Analyze an Income Statement
Start with Revenue Quality
Do not look only at whether revenue increased. Check why it increased. Revenue growth may come from higher sales volume, better pricing, new customers, repeat orders, new branches, or one-time income. Recurring and operating revenue are more reliable than one-time gains.
Review Gross Margin
If revenue rises but gross margin falls, the business may be facing higher purchase costs, weak pricing power, discount pressure, wastage, or poor product mix.
For example, a trader may report higher sales during a discount campaign, but actual gross profit may fall because goods were sold at lower margins.
Compare Operating Expenses with Revenue
Operating expenses should not grow faster than revenue for long periods. If salary, rent, marketing, or administrative costs are rising faster than sales, the operating margin will come under pressure.
This is especially important for growing businesses because expansion can hide cost inefficiency for a few months.
Separate Operating Profit from Other Income
A business may report profit because of interest income, rent, or asset sale. That does not always mean core operations are strong.
EBIT is important because it focuses on operating performance. If net profit is positive but EBIT is weak, the business should review its core operations.
Review Finance Cost
Rising finance costs can reduce net profit even when operating profit is healthy. This is common in businesses with heavy working capital loans, high inventory funding, or delayed receivables.
If financing costs continue to rise, the business should review its credit policy, inventory cycle, loan structure, and repayment planning.
Check Effective Tax Rate
Effective Tax Rate = Tax Expense / Profit Before Tax x 100
A very low or very high effective tax rate should be reviewed. It may be due to deferred tax, disallowances, exemptions, losses, concessional tax regimes, or one-time adjustments.
Read Notes to Accounts
The income statement should be read with notes to accounts. Notes explain revenue recognition, depreciation policy, related-party transactions, provisions, contingent liabilities, exceptional items, and accounting estimates .
The main statement gives the numbers. The notes explain the accounting treatment behind those numbers.
Income Statement vs Balance Sheet vs Cash Flow Statement
| Statement | Income Statement | Balance Sheet | Cash Flow Statement |
|---|---|---|---|
| Main Question | Are we profitable? | What do we own and owe? | Do we have cash? |
| Time Scope | Period | Specific date | Period |
| Main Items | Revenue, expenses, profit | Assets, liabilities, equity | Cash inflows and outflows |
| Accounting Basis | Accrual | Accrual | Cash |
| Key Output | Profit or loss | Net worth | Net change in cash |
- Net profit reported on the income statement increases retained earnings on the balance sheet , subject to dividends, transfers, and adjustments.
- Net profit is also the starting point for cash flow from operations under the indirect method. It is adjusted for non-cash items and working capital changes.
- A business can be profitable but still face cash pressure if customers delay payment, inventory is high, or expenses are paid before collections are received
Accrual vs Cash Basis Accounting
Accrual Basis
Under accrual accounting, revenue is recorded when earned, and expenses are recorded when incurred, not when cash is received or paid.
This means sales made in March are recorded in March even if payment is received in April, provided revenue recognition conditions are satisfied.
Cash Basis
Under cash basis accounting , revenue is recorded when cash is received and expenses are recorded when cash is paid.
This may be simpler for very small businesses, but it can distort profit. For example, March sales collected in April will not appear as March revenue under cash basis.
| Scenario | Accrual Treatment | Cash Basis Treatment |
|---|---|---|
| Goods sold for ₹5,00,000 in March, payment received in April | Revenue recorded in March | Revenue recorded in April |
| 12-month insurance paid upfront | Expense spread over policy period | Full expense recorded when paid |
Most companies and businesses use accrual accounting because it gives a more accurate view of performance for the period.
Common Errors When Preparing an Income Statement
| Error | What Goes Wrong | How to Avoid It |
|---|---|---|
| Recording revenue too early | Profit is overstated | Recognise revenue only when goods or services are delivered as per applicable standard |
| Treating GST as revenue | Sales are overstated | Record GST collected as liability, not income |
| Using total income for gross margin | Gross margin becomes misleading | Use revenue from operations, not total income including other income |
| Expensing capital assets | Profit is understated in purchase year | Capitalise long-term assets and depreciate them |
| Ignoring depreciation | Profit is overstated | Apply Schedule II or applicable standard consistently |
| Mixing personal and business expenses | Business profit becomes unreliable | Keep separate business and personal accounts |
| Omitting provisions | Future liabilities are ignored | Provide for probable liabilities such as bad debts, warranty, gratuity, or claims |
| Booking expenses in wrong period | Monthly or annual profit is distorted | Match expenses to the period they relate to |
| Labelling normal items as exceptional | Profit quality becomes unclear | Use exceptional classification only when justified and disclosed |
| Comparing ratios with different denominators | Trend analysis becomes misleading | Use the same denominator consistently, usually revenue from operations |
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Conclusion
An income statement is the main report for understanding business performance. It shows where revenue comes from, where money is spent, and how much profit remains after direct costs, overheads, finance costs, and tax.
For everyday business decisions, a multi-step management P&L is more useful than a simple income-and-expense summary. It helps track gross margin, operating margin, finance cost, tax impact, and net profit.
For Indian companies, the final statutory presentation must follow Schedule III and the applicable accounting framework. Businesses should also stay updated on the applicability of Ind AS, AS amendments, tax rate changes, and disclosure requirements.
BUSY's financial accounting software lets you prepare multi-step income statements, automatically track gross margin and EBIT, correctly classify operating and finance costs, and generate Schedule III-compliant P&L reports without manually building formats in spreadsheets.
