A Basic Guide
The Income Statement shows the inflow and outflow of a business' resources over a period reflecting the company's profit or loss.
The period is known as the financial year.
Inflow is expressed as Revenue/Income
Outflow is expressed as Expenses / CostsIncome Statements: What it tells you
The Income Statement provides details about the Revenues and Expenses of a business.
Revenues are usually earned by selling goods or providing services to customers.
Expenses are the costs incurred by the business in the process of generating income
When a business sells an item, the proceeds are considered as Revenue :- the Sales/Revenue account increases
Should the business pay a bill for electricity, the Expense account increases
In other words, Revenues contribute to profits and Expenses reduce profits
The difference between Total Revenues and Total Expenses is called the net profit/loss.
The following equation explains this statement:
TOTAL REVENUES for the period
- Total Expenses for the period
= Net Profit/Loss for the period (This amount is transferred to the Balance Sheet)
This is why the Income Statement is also referred to as the Profit and Loss Account.Tip!
Shareholders sometimes "milk" a company by way of dividends leaving very little of the profit to be re-invested in the company. One should also take this into consideration when interpreting a company's profits.
Income Statements: Who uses itThe information supplied in the Income Statement is usefulto:
- Users within the business (internal)
- Directors of Companies
- Members of Closed Corporations
- Partners of Partnerships
- Owners / Sole Proprietors
- Users outside the business (external)
- Receiver of Revenue
External users need the Income Statement for various reasons:
- Shareholders invest in a company and have an interest in the business
- Banks require them for assessment when a business applies for credit
- The Receiver of Revenue uses them for tax purposes
Income Statements: Glossary of Terms
TerminologyIncome Statement Turnover (Sales/Gross Sales/Sales Turnover)
This represents the total income received by a business for its trading activities, being sales and/or services. The figure is shown after discounts given to customers have been deducted.