Study notes on income statements, showing profits how to measure them and expenses and how to recognise them. Including two examples of income statemenets.
Income Statement
We use the income statement to provide information on the effectiveness of the business in
generating wealth, and how the profit was derived.
Measuring Profit
Profit (or loss) for the period = Total revenue for the period – Total expenses incurred in
generating that revenue
Relationship between income statement and statement of financial position
Assets = Equity + (or –) Profit (or loss) + Liabilities
The basic criteria that needs to be first met before revenue can be organised:
The revenue amount can be measured reliably
It is likely that the business will receive the economic benefits
Further criteria to be applied when the revenue is sourced from the sale of goods:
Ownership and control of the item has to pass to the buyer
Layout for the Income Statement
Sales Revenue
- Minus
Cost of Sales
- Equals
Gross Profit
- Minus
Operating Expenses
- Equals
Operating Profit
- Minus
Interest Payable
- Plus
Interest Receivable
- Equals
Profit for the Period
, Income Statement Example: Better-Price Stores 30th June 2016
£000s
Sales Revenue 232
Cost of Sales 154
Gross Profit 78
Salaries and Wages (24.5)
Rent and Rates (14.2)
Heat and Light (7.5)
Telephone and Postage (1.2)
Insurance (1)
Motor Vehicle Running Expenses (3.4)
Depreciation – Fixtures and Fittings (1)
Depreciation – Motor Van (600)
Operating Profit 24.6
Interest Received from Investments 2
Interest on Borrowings (1.1)
Profit for the Period 25.5
Classification of Expenses
Cost of Sales, this is the cost incurred when buying or producing goods that have been sold
(or from providing the service), including any expensed incurred while selling and delivering
the product or service, by the business during a given period of time.
Cost of Sales doesn’t include the cost of the goods that were purchased by the business
during the period
Gross Profit for Better-Price Stores
Accounting Conventions
Accruals Convention: these expenses need to be matched up to the revenue they helped to
generate and need to be taken into account in the income statement for the period in which
the revenue was reported.
Materiality Convention: items of immaterial amounts can be treated as expenses rather
than strictly being matched to the revenue to which they relate, during the period in which
they were incurred.
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