Financial Accounting – NOTES CHAP 4 The income statement or profit/loss account
INTRO
The income statement records an orga’s income and expenses and is prepared from the trial balance. It’s
one of the 3 major financial statements.
-it seek to determine an orga’s profit over a period of time. It measures an orga’s performnc.
CONTEXT
-It cover an orga’s income and expenses over a certain period of time which may vary.
- For internal management purposes, we prep a monthly income statement
- For external users (shareholders, tax authorities) we prep an annual account.
than statement of financial position because :
- The stat of finan posit° presents an orga’s assets, liabilities and capital
- It is presented at a particular point in time.
than the statement of clash flows because:
- The stat of cash flows presents the cash inflows and the cash outflows of a business
The 3 major parts of the income statement
Income−Expenses =Profit
Profits are central to evaluating an orga’s performance. And the profit figure is impo as it’s used for a
variety of purposes. It’s used as an overall measure of performance and for more specific purposes (such as
the basis by which companies distribute dividends for shareholders or as a starting point of workg out the
taxat° payable to the government).
DEFINITION
The income statement
Workg def : the statement detailing the income less the expenses of an orga over a period of time, giving
profit
Formal def : a key finan statmt which represents an orga’s income less the expenses over a period of time
and thus determines its profit so as to give a “true and fair’ view of an orga’s finan. affairs.
Income
-represents the money earned by an orga (sales, revenue).
Workg def : revenue and other gains earned by a business
Formal def : increases in economic benefits during the acctg period in the form of inflows or enhancements
of assets or decreases of liabilities that result in increases in equity.
Expenses
-represents the costs of generating these sales and of running the business
Workg def : costs incurred running a business
Formal def : decreases in economic benefits during the acctg period in the form of inflows or
enhancements of assets or incurrences of liabilities that result in decreases in equity.
LAYOUT
-presented in a vertical format
-Begin with revenue/sales than deduct expenses
- the income statement of the sole trader is more clearly derived from the
trial balance than companies
MAIN COMPONENTS (6 )
Revenue/sales, cost of sales, gross profit, other income, expenses and net
profit
