Income Statement Simplified

The Income statement discloses the financial performance of an enterprise during a given year or operating cycle.

That is whether the enterprise’s operations resulted in a profit or loss.

It is therefore a profitability statement that shows an organization’s revenues and expenditures or costs in a particular period.

This statement is normally prepared before the statement of the financial position because the ending figure after subtracting expenditures from incomes (net or retained profits or loss) connects the income statement and statement of financial position.

Initially, it is critical to appreciate that the income statement is part of the double-entry system bookkeeping system, whereas the statement of financial position is not.

It is easy to be put off by the fact that the income statement is set out in vertical form whereas other ledger accounts are set out in ‘T’ account form.

However, you must remember that, although not presented as such, the income statement is a ‘T’ account and the double entry principles apply therein as with any other such account.

Below, we present the vertical format or statement. Still, for the avoidance of doubt, we follow it with an example that compares the vertical format and the horizontal format of the income statement. You should however note that the income statement has two sections;

•  The trading account and
• The profit and loss account

Later you will discover that the second section is followed by 3) other comprehensive income.

In which case the income statement now becomes the statement of comprehensive income or simply income statement and other comprehensive income; The format of a statement of comprehensive income (as is published) will also be shown.

 The income statement takes the following format

XYX Income statement for the year ended

Sales; revenue                                                                                  XXXX                      

Less; Cost of goods sold.                                                      

Operation inventory                                                                XXX

Add purchases                                                                                    XXX

                                                                                                XXX

Less Closing inventory                                                           XXX   XXXX

Gross profits                                                                                       XXXX

Less; Operating expenses

Rent                                                                                        XXX

Electricity                                                                                XXX

Salaries                                                                                    XXX

Etc                                                                                           XXX   XXXX

Net profit before finance costs and taxation                                      XXXX

Finance costs                                                                           (XXX)

Net profit before taxation                                                                   XXXX

Taxation                                                                                  (XXX)
Net profit for the year                                                                         XXXX

The trading account ranges from the sales revenue to the gross profit.

And the profit and loss account ranges from gross profit to net profit after tax.

Manufacturing companies have an additional account called the manufacturing account or manufacturing cost statement. This statement will be given its due treatment later in the text.

However, the income statements for service firms like National Water and Sewerage Cooperation are slightly modified to suit the following format;

XYZ Income for the year ended………….

Income revenue                                                                                   XXXX

Less expenditures                                                                               XXXX

……… before financial costs and taxation                                        XXXX

….costs                                                                                               (XXX)

…..\profit before taxation                                                                   XXXX

………                                                                                                (XXX)

……../profit for the year                                                                     XXXX

Note; Finance costs include items of interest on loans, overdrafts, debentures, leases…… and any other forms incurred in raising finances

Income Statement Calculations Example

Question: From the following particulars relating to the firm of Tirisa for the year ending December 2023. Prepare trading account

                                                                                                            USD

Sales ……..                155,000

Sales returns                                     8,000

Purchase                                                     140,000

Purchase returns                                         18,500

……..inwards                                         12,000

Purchase wages      10,000

Opening stock 1\1\2010                                                           55,000

Closing stock 31/12/2010                                                          85,000

TIRISA Trading account for the year ending 31^st December 2023

                                Usd             Usd Usd

Income from sales                        155,000

Less Sales returns                                     (8,000) Sales value                                         147,000

…………

Less cost e.g. goods sold

Opening stock                                     55,000

Purchases                                            140,000

……….inwards                                    12,000

                                                       152,000

Less purchase return                           (18,500)

Net purchases                                             133,500

….available for sale                                      188,500

………..wages                                                10,000

                                                                                  198,500

……closing stock  (85,000)                     

…….of goods sold                         (113,500)

Gross profit                      33,500

Conclusion

For more accounting information please check out the CPA online monthly journal from the New York State Society of CPAs.