Income Statement shows net profit or net loss arising out of activities of a particular accounting period of any business organization.
Of all the financial statements income statement is very popular and important.
The balance which stands after deduction of total expenses from total income of a particular accounting period is called net income. Negative net income may be termed as net loss.
Incomes mean the profit received from sale of commodities, rendering services, interest received from third party for using the assets of business concern, rent, royalty etc. and selling or exchanging any asset other than commodities.
Expenses mean the expenses directly related to incomes of a particular accounting period, and other expenses of that accounting period, such as payable interest, loss sale of assets and loss of properties due to accident etc.
Income statement is of two types:
(a) Single step income statement,
(b) Multiple step income statement.
Single Step Income Statement
In single step income statement sales or service income and other incomes are to be added in the first stage.
all operating expenses including cost of goods sold and other expenses are deducted from total income to ascertain net profit or loss.
In single step income statement all data are divided into two groups : Such incomes and expenses. Income includes operating income plus other incomes. Expenses include cost of goods sold, operating expenses and other expenses.
Multiple Step Income Statements
In this statement profit or income is ascertained showing various incomes and expenditures separately in different stages.
Generally multiple steps income statement contains the following steps of incomes and expenses;
- Operating revenue: Operating revenue means the revenue arising out of main activities of the business. For example, revenue out of sales and services rendered are both operating revenue.
- Cost of goods sold: Cost of goods sold is an important aspect of a business concern. In income statement gross income is determined deducting cost of goods sold from income out of net sales. Surplus of net sale over cost of goods sold is called gross profit.
Cost of goods sold = Beginning inventory + Net purchase + Carriage In Ward – Ending Inventory. Gross profit = Net sales – Cost of goods sold.
- Operating expenses: Expenses relating to administrative and selling activities other than cost of goods sold are operating expenses.Operating expenses are of two types, such as selling expenses and administrative expenses.The expenses incurred in connection with sale of goods and marketing are called selling expenses.Such as; Salesman salaries and commission Salesman travel expense Delivery expense, Advertising, utilities, rent- store building, store supplies used etc.Expenses relating to overall management of the business are called administrative expenses.For example,Office salaries, rent-administrative building, insurance, office supplies expense, postage, telegram, conveyance, general expense, depreciation expense, office equipment, furniture etc.
- Non-Operating Income and Expenses: The incomes which are not related to sales income or service income are called non-operating income.For example,Interest on investment, interest on notes receivable, accrued house rent from subletting, profit arising out of sale of assets etc.The expenses which are not related to purchase – sale and administrative expenses are called non-operating expenses. Such as, interest on loan, interest on capital, accidental loss, loss on sale of assets etc.
Important Relationships in the Income Statement
In brief the important relationships in the income statement are shown below :
- Net sales = Gross sales – (sales discount + sales returns and allowances).
- Net purchase = Purchase – (Purchase discount + purchase returns and allowance).
- Net cost of purchase = Net purchase + transportation In.
- Cost of goods sold = Beginning inventory + net cost of purchase – ending inventory.
- Gross margin = Net sales – cost of goods sold.
- Gross Margin rate= (Gross margin X 100)/Net Sales
- Net income from operation = Gross margin – operating expenses.
- Net income = Net income from operation + non-operating revenue – non-operating expenses.