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:
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AN INCOME STATEMENT:- |
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Reports ONLY the PROFITABILITY of a business |
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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). |
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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. |
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A few years ago, this Income Statement is called PROFIT & LOSS Statement. Nowadays, it is called Income Statement or Earnings Statement |
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The basic equation for the Income Statement is: Revenue less Costs & Expenses = Income |
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When Revenue is MORE than Costs & Expenses = Income/Profit/Earnings ( The term Income or Profit or Earnings has the same meaning) |
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When Revenue is LESS than Costs & Expenses = Loss |
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The Normal Format Of An Income Statement is as follows: |
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INCOME STATEMENT FOR THE PERIOD FROM 1/1/06 TO 31/12/06 |
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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 |
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