Income Statement

Is a company’s financial statement that indicates how the revenue (income) is transformed into net income (the result after all revenue and expenses have been accounted for); it is also referred to as the profit and loss (P & L) statement or statement of financial operations.

The income statement represents a period of time, rather than a single point of time like the balance sheet does.

There are two main sections: Operating and Non-Operating.

Operating Section

  • Revenues- inflows from the company’s ongoing business operations. Every time a business sells a product or provides a service, it obtains revenue. They are usually reported minus returns, discounts and allowances.
     
  • Expenses- outflows from carrying out activities that are part of the company’s ongoing business operations. Included are:
    • Cost of Goods Sold (COGS) - refers to the direct cost of goods produced and sold by a business.
       
    • Selling Expenses – represent expenses needed to sell products such as salaries, commissions, travel expenses, advertising, shipping and others.
       
    • General and Administrative Expenses – represent expenses used to manage the expenses. Examples are: salaries of officers/executives, utilities, legal and professional fees, office rent and office supplies.
       
    • Depreciation/Amortization – the charge with respect to fixed assets/intangible assets that have been capitalised in the balance sheet.
       
    • Research and Development Costs - represent expenses occurred in research and development.  

Non-Operating Section

  • Other Revenues/Gains - gains not from ongoing business operations. Examples are: income from patents, rent and gain from sale of securities.
     
  • Other Expenses/Losses – expenses not related to primary business operations. For example, foreign exchange loss.
     
  • Finance Costs – expenses related to the cost of borrowing from various creditors. Examples are: interest expenses, bank charges
     
  • Income Tax Expense – the amount of tax payable to authorities in the current reporting period.

Sample Income Statement

Year Ended March 31,

2011

2010

Revenue
 

Rs. 1,50,000

1,30,000

Cost of Sales
 

Rs. (75,000)

(65,000)

Gross Profit
 

Rs. 75,000

65,000

Operating Expenses:

 

 

Selling, General and Administrative Expenses

Rs. (20,000)

(15,000)

Depreciation

Rs. (5,000)

(5,000)

Operating Profit
 

Rs. 50,000

45,000

Interest Income
 

Rs. 2,000

1,500

Interest Expense

Rs. (10,000)

(12,000)

Profit Before Tax
 

Rs. 42,000

34,500

Income Tax Expense
 

Rs. (9,000)

(7,500)

Profit (Loss) For the Year

Rs. 33,000

27,000