Income Statement:
Contents:
-
Definition
and Explanation
-
Format of
Income Statement
-
Different Items of Income Statement
-
Income Statement of Manufacturing Companies
-
Service Enterprises
An income statement shows the results of operating
for a period of time. It is sometimes called
operating statement or statement of operations. It
shows how well an organization performed during the
period covered.
The term revenue,
expense and profit should be somewhat familiar to
you already. Revenue is the inflow of assets in
return for services performed or products delivered
during a period; an expense is a sacrifice, or cost
incurred to generate (produce) revenue; net profit
is simply the amount by which the revenues for a
particular period of time exceed the expenses
incurred to generate them.
Revenue
generally considered earned when services are
performed or goods are sold, regardless of when
money is actually received. In other words, revenues
are identified with the period in which they are
earned. For example, a retail trader earns revenue
when a sale is made on credit. A right to receive
money is recognized as account receivable. An
account receivable (debtor a/c) is an asset that
will eventually be converted to cash.
Expenses are also recognized in the period that is
benefited, regardless of when payment is made in
cash. For example, salaries earned by employees are
considered an expense of the period in which
employees work, even though they may not be paid in
cash until the following period. Thus the amount by
which the revenues for a particular period of time
exceed the expenses incurred to generate them is
called net income or net profit.
For example suppose
during the month of January, a trader has a total
revenue (sales) of $55,000 and has incurred total
expenses of $46,000, his net income will be $9,000
(55,000 - 46,000) for the month of January.
Thus an income
statement is a statement in which revenues for a
period of time are matched with expenses for the
same period of time. If revenues exceed the
expenses, the result is net income, and if expenses
exceed the revenues, the result is net loss. The
format of income statement varies with the needs of
users, preferences of accountants and other
circumstances.
The format of a common
income statement is given below:
Name of Business
Income Statement
For the year ended......
|
$ |
$ |
$ |
$ |
Sales |
|
|
525000 |
|
Less:
Sales discount |
|
6500 |
|
|
Sales returns and allowances |
|
8500 |
15000 |
|
|
|
|
|
|
Net
sales |
|
|
|
510,000 |
Less Cost of Goods Sold: |
|
|
|
|
Merchandise inventory opening |
|
|
35,000 |
|
Purchases |
|
320,000 |
|
|
Less:
Purchase discounts |
5,000 |
|
|
|
Purchase returns and allowances |
3,000 |
8,000 |
|
|
|
|
|
|
|
Net
purchases |
|
312,000 |
|
|
Plus
carriage inwards |
|
1,2500 |
|
|
|
|
|
|
|
Delivered cost of net purchases |
|
|
324,500 |
|
|
|
|
|
|
Cost
of goods available for sale |
|
|
359,500 |
|
Less
merchandise inventory |
|
|
37,500 |
|
|
|
|
|
|
Cost
of goods sold |
|
|
|
322000 |
|
|
|
|
|
Gross
profit |
|
|
|
188,000 |
Less Operating Expenses: |
|
|
|
|
salaries |
|
|
91,600 |
|
Advertising |
|
|
7000 |
|
Depreciation |
|
|
8500 |
|
|
|
|
|
|
Total
Operating expenses |
|
|
|
107100 |
|
|
|
|
|
Net
operating income |
|
|
|
80,900 |
Plus Other revenues: |
|
|
|
2500 |
Commission received |
|
|
|
|
|
|
|
|
83,400 |
Less other expenses: |
|
|
|
|
Interest expenses |
|
|
|
900 |
|
|
|
|
|
Net
income |
|
|
|
82500 |
|
|
|
|
|
Sales:
It is the gross amount
of goods sold or services rendered during an
accounting period.
Net Sales:
When sales discount,
sales returns and allowances to customers are
deducted or subtracted from gross sales the result
is net sales.
Cost of Goods Sold:
It represents the sum
of the costs of all goods which have been sold
during the accounting period. It is ascertained by
adding the value of unsold goods at the beginning of
the year (opening inventory or stock) to the
purchases made during the year and the deducting the
values of unsold goods at the end of the year
(closing inventory of stock) from the purchases.
Theses are expired costs, and thus are actual
expenses for the year.
Gross Profit:
Goods are normally
sold at a price that is more than the cost price.
Gross profit or gross margin is what remains after
cost of goods sold is deducted from net sales. This
is the margin that is available to cove the other
expenses for a period and to yield net income, if
there is any.
Gross Profit = Net
sales - Cost of goods sold
Operating Expenses:
Merchandising or
trading concerns incur operating expenses in
addition to cost of goods sold. So, the expenses
which are incurred for the generation of revenues
from the sales of goods are called operating
expenses. Operating expenses may be divided into
two:
- Selling Expenses:
All expenses regarding sale of goods and sending them to
the buyer belong to this class e.g. Carriage outwards,
advertisements, salesmen's salaries, sales commission,
traveling expenses, bad debts, packaging expenses etc.
- Administrative
Expenses: All expenses connected with the office and
its conduct are called administrative expenses. Examples
of administrative expenses include office salaries,
office rent, electric charges, postage and telegrams,
telephones, printing and stationary etc.
Net Operating Income:
Operating expenses are
deducted from gross profit to arrive at net operating
income. Net operating income is what is left after both
cost of goods sold and operating expenses for a period
have been deducted from net sales. For a merchandising
concern, it is what has been earned from the normal
operations of buying and selling merchandises.
Net
operating income = Gross profit - operating expenses
OR
Net
operating income = Net sales - Cost of goods sold -
Operating expenses
Other Revenues and Expenses:
Non-sales revenues
(which have not been earned by selling merchandise) and
non-operating expenses are reported towards the bottom
of an income statement under the heading, other
revenues and expenses. Included in the revenues are
revenue from rentals (rent received), interest income,
gain on loss of assets other than merchandise and other
miscellaneous revenue items. Under other expenses are
interest on borrowed money, loss on sales of assets
other than merchandise, and other non-operating expenses
and losses.
Net Income:
Other revenues are
added to an other expenses are deducted from net
operating income to arrive at net income. Net income is
what is left after the other revenues have been added to
net operating income and other expenses have been
deducted from it.
Net
income = Net operating income - Other revenues - Other
expenses
Or
Net
operating income = Net sales - Cost of goods sold -
Operating expenses + Other revenues - Other expenses
There is a small
difference between the income statement prepared by
manufacturing companies and income statement
prepared by merchandising companies. Manufacturing
companies also calculate cost of goods manufactured
in their income statement. This calculation is not
required by merchandising companies.
Following is an
example of the income statement of a
manufacturing company:
Income Statement
For the year ended 31st December, 2005
Sales |
|
|
|
24750000 |
Direct
Materials: |
|
|
|
|
Materials inventory, January 1, 2005 |
|
1572400 |
|
|
Purchases |
8420000 |
|
|
|
Less
purchases returns and allowances |
42,000 |
8378000 |
|
|
|
|
|
|
|
Materials available for use |
|
9950400 |
|
|
Less
materials inventory, December 31,
2005 |
|
1270600 |
|
|
|
|
|
|
|
Direct
materials consumed |
|
|
8679800 |
|
Direct
labor |
|
|
7346400 |
|
Factory overhead: |
|
|
|
|
Indirect labor |
|
1329300 |
|
|
Salaries |
|
972000 |
|
|
Payroll taxes |
|
489000 |
|
|
Power |
|
112000 |
|
|
Heat |
|
69200 |
|
|
Light |
|
44300 |
|
|
Factory supplies |
|
50000 |
|
|
Depreciation - factory building |
|
68300 |
|
|
Depreciation - machinery |
|
403000 |
|
|
Repairs and maintenance |
|
145800 |
|
|
Patent amortization |
|
33200 |
|
|
Tools and dies used |
|
178600 |
|
|
Insurance on building and machinery |
|
21200 |
|
|
|
|
|
|
|
|
|
|
3915900 |
|
|
|
|
|
|
Total
manufacturing cost |
|
|
19942100 |
|
Add
work in process inventory, January 1
2005. |
|
|
2338000 |
|
|
|
|
|
|
Total
cost to be accounted for |
|
|
22280100 |
|
Less
work in process inventory, December
31 2005. |
|
|
1303200 |
|
|
|
|
|
|
Cost
of goods manufactured |
|
|
20976900 |
|
Add
finished goods inventory, January 1,
2005 |
|
|
966100 |
|
|
|
|
|
|
Cost
of goods available for sale |
|
|
21943000 |
|
Less
finished goods inventory, December
31, 2005. |
|
|
658000 |
|
|
|
|
|
|
Cost
of goods sold |
|
|
|
21285000 |
|
|
|
|
|
Gross
profit |
|
|
|
3465000 |
Less
commercial expenses: |
|
|
|
|
Marketing expenses |
|
580000 |
|
|
Administrative expenses |
|
533750 |
|
|
|
|
|
|
|
|
|
|
|
1113750 |
|
|
|
|
|
Income
from operation |
|
|
|
2351250 |
Other
income and expenses: |
|
|
|
|
Royalties and dividends |
|
167000 |
|
|
Gain from sales of plant |
|
12000 |
|
|
|
|
|
|
|
|
|
179000 |
|
|
Interest and debt expenses |
|
129500 |
|
|
|
|
|
|
|
Net
addition |
|
|
|
49500 |
|
|
|
|
|
Income
before income tax |
|
|
|
2400750 |
Less
income tax |
|
|
|
1064250 |
|
|
|
|
|
|
|
|
|
1336500 |
|
|
|
|
|
Service enterprises are
the business concerns which are engaged to perform or
provide services only. They do not deal with the
purchase and sale of merchandise (goods). Their major
source of revenue is fees, commission, rent or interest
etc. which they receive from their customers or clients
against the services provided to them. For example
doctors, lawyers, chartered firms, workshops etc.
The income statement
for a service enterprise is prepared in the same way as
we prepare for merchandising concerns except that the
nature of revenues and expenses is different.
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