Income statement

The income statement shows financial performance over time. It is also commonly known as a profit and loss account or statement of Financial Performance. 

Incorporating all revenues earned in business and subtracting all expenses, the ascertainment of profit or loss is possible. 

The income statement is a primary statement along with the balance sheet, the cash flow statement and statement of changes in equity.  

Reasons for preparing an Income Statement 

There are several reasons why a company generates an income statement: 

  • To show total earnings made during the period 
  • The estimation of the total costs 
  • To calculate the profit/loss reported for the period 
  • Legal reasons (all limited companies are required to produce an income statement) 
  • Taxation Explanations (by calculating profits (or losses), businesses can accurately calculate their tax payments) 
  • Calculation of sales costs 
  • Comparison with past years performance or with other companies 

Main Components of an income statement 

The primary components of the statement of revenue are: 

  1. Sales/ Turnover: This is the overall amount of the items sold. 
  1. Cost of Goods Sold (COGS): This is the direct cost incurred to make a sale, like the raw materials, direct labour. 
  1. Gross profit: Gross profit net sales less cost of goods sold. Net sales number is turnover net of VAT, trade discounts and sales returns/ refunds.  
  1. Administrative expenses: These include all the indirect costs, such as rent, salaries, depreciation, marketing, selling costs and utilities, incurred by the business. 
  1. Profit/ loss before tax: It is gross profit, less administrative expenses.  
  1. Profit after tax: It is profit/loss before tax less tax.  

Example 

ABC ltd 
Income statement 
For the year ended 31 December 2020 
 Amount in GBP 
Sales 100,000 
Cost of sales (40,000) 
Gross profit 60,000 
Administrative expenses (20,000) 
Profit before tax 40,000 
Corporation tax (7,600) 
Profit after tax (32,400) 
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