Basic Bookkeeping Online Guide » Income Statement

How to prepare the Single Step & Multiple-Step Format Of The Income Statement

slang — Fri, 11 Sep 2009 02:25:38 +0000

For bookkeeper, it is important to understand that there are a few ways of preparing the format of an Income statement. Basically, there are two formats namely the Single Step Format and Multiple-Step Income Statement.

Below are the format for both the Single step and Multiple-Step Format of Income Statement. Also mentioned are their advantages and disadvantages.

Format of A Single Step Income Statement

	$
Revenues
Net Sales	180,000
Gains	10,000
Total revenues	190,000
Expenses
Cost of goods sold	55,000
Selling and administrative expenses	24,000
Interest expenses	10,000
Losses	8,000
Income tax expenses	15,000
Total expenses	112,000
Net Income	78,000

Format of A Multiple Step Income Statement

	$
Net Sales	180,000
Cost of goods sold	55,000
Gross Profit	125,000
Selling and administrative expenses	24,000
Operating Profit	101,000
Other revenues and gains	10,000
Other expense and losses	18,000
Pretax income from continuing operations	93,000
Income tax expenses	15,000
Net Income	78,000

Whether you use the Single Format Income Statement or Multiple Step Income Statement, you will still get the end result/bottom line re: same net income.

The advantages of using the multiple step income statement format are:

It clearly display important financial and managerial information
The four measures of profitability are revealed at four critical areas of a company’s operation namely gross profit, operating profit/operating income, pretax income and after tax net income

As for the single step format of Income Statement, the advantage is that is relatively simple to prepared and understand however, the gross and operating income figures are not stated which need to be computed.

Snapshot of how to prepare the Income statement,Owner’s equity statement and Balance sheet statement

slang — Fri, 11 Sep 2009 02:20:14 +0000

Append below, a simple snapshot of preparing the following financial statements:

(a) How to prepare the Income Statement:

All temporary or nominal accounts relating to incomes and expenses are closed by using closing entries and transferred to the Income Statement/Summary

Journalize the closing entries as follows:

For all Revenue accounts:

Debit Revenue Account Credit Income Summary

For all Expenses accounts:

Debit Income Summary Credit Expense Account

(b) How to prepare Owner’s Equity Statement:

From (a) the Income statement is transferred to the Owner’s Equity Statement

For Profit in the Income Summary:

Debit Income Summary Credit Owner’s Capital

For Loss in the Income Summary:

Debit Owner’s Capital Credit Income Summary

The Owner’s drawing account which is part of temporary/nominal account is similarly closed by using closing entry and transferred to the Owner’s Equity Statement

Accounting entries:

Debit Owner’s Capital Credit Drawings Account

All permanent or real accounts like all asset accounts, all liability accounts and owner’s capital account are not closed and transfer to the Balance Sheet(refer to vertical and horizontal format)

Components Of An Income Statement(Part2of2)

slang — Sat, 03 Nov 2007 09:36:30 +0000

Further to Part 1 where we understand what is an Income Statement. This article looks at what are inside the Income Statements:

COMPONENTS IN THE INCOME STATEMENT:

Net Revenue A

Cost of Goods B

Gross Margin C=A-B

NET REVENUE:

NET REVENUE are the list prices of the goods and/services less any discounts offered to the customer to induce purchase.

Don’t forget that these revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received which follow strictly to the matching and accrual accounting concept.

COST OF GOODS SOLD

COST OF GOODS comprise the TOTAL COST OF THE PRODUCT BEING SOLD.

Originally, when the manufacturer made the product, all the cost related to the product are added to the value of the inventory. When the product is sold, these costs of inventory are then expensed through the Income Statement as cost of goods sold.

GROSS PROFIT MARGIN

GROSS PROFIT MARGIN is simply Net Revenues less Cost of Goods Sold

The higher the gross margin, it means that there is a higher MARK-UP on the costs of Goods Sold .

Of course, a higher gross profit margin is favourable.

The higher the gross profit margin, it means that the company can absorb more overheads and can sustain longer when there is a period of recession where business dropped

Income Statement(Part1of2)

slang — Sat, 03 Nov 2007 09:30:30 +0000

From the bookkeeping perspective, once we have put in all the relevant adjustments, we can then from the post adjusted trial balance to extract/prepare the Income Statement.

Before preparing even this Income Statement ( which was previously called by many as Profit & Loss Account/Statement), we need to know what really is this Income Statement.

Let now look at the Income Statement:

AN INCOME STATEMENT:-

Reports ONLY the PROFITABILITY of a business

Unlike a Balance Sheet, which is a snapshot of a point of time, Income Statement reflects the profitability of a business FOR A SPECIFIC PERIOD OF TIME (monthly, quarterly or yearly).

In the Income Statement, MATCHING/ACCRUALS/REVENUE RECOGNITION concepts/principles will prevails:

Revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received.

Expense is recognized in the period in which goods and services are used, not necessarily the period in which cash is paid.

A few years ago, this Income Statement is called PROFIT & LOSS Statement.

Nowadays, it is called Income Statement or Earnings Statement

The basic equation for the Income Statement is:

Revenue less Costs & Expenses = Income

When Revenue is MORE than Costs & Expenses = Income/Profit/Earnings

( The term Income or Profit or Earnings has the same meaning)

When Revenue is LESS than Costs & Expenses = Loss

The Normal Format Of An Income Statement is as follows:

INCOME STATEMENT FOR THE PERIOD FROM 1/1/06 TO 31/12/06

Net Revenue A

Cost of Goods B

Gross Margin C=A-B

General & Administrative D

Sales & Marketing E

Research & Development F

Operating Expenses G= D+E+F

Income From Operations H =C-G ( Gross margin less Operating Expenses)

Interest I

Income before taxes J=H-I

Net Income after taxes K