When you outsource your accounting tasks to an accounting firm in Johor Bahru, the accountants will not only record business transactions timely but also prepare the essential financial statements for you. The income statement (Also see What is an Income Statement?) is one of the crucial financial reports that all businesses should generate. It provides the summary for all revenue earned and expenses incurred in a specific timeframe.
The income statement aims to determine the company’s profit or loss, and it acts as a measure of the business activities that it has carried out. Thus, the main purpose of studying the company’s income statement (Also see Why Do We Need the Income Statement?) is to let the readers get a clear picture of the revenue and expenses of the company in that accounting period. By looking at this statement, one will be able to determine whether the company is profitable and whether it can earn recurring revenues from its continuous operations.
The first line item in the income statement (Also see The Income Statement and the Balance Sheet) is the total sales revenue. This amount shows the sum of money that the sales of products or services have brought to the business. Note that business owners who apply the accrual basis of accounting should recognise the revenue (Also see Ways to Increase Your Business Revenue) earned in their books of accounts even though they have not received cash from the sale to be in line with the revenue recognition principle.
Some companies may include sales discount and sales returns in their income statement. Sales discount refers to a price reduction that the company offers to its customers if they pay the bills early. Sales returns are the goods that the customers send back to the company due to reasons such as defective products, products sent are not what they have ordered, the company has sent extra goods to them, and so on. After deducting the amounts of sales discounts or sales returns from gross sales, we will get the sum of net sales.
In the income statement, you will see the cost of goods sold too. This is the sum of money the company pays for the merchandise sold in the accounting period. To calculate the gross profit earned, one should deduct the cost of goods sold from the company’s net sales. The gross profit and gross profit margin are both useful in helping the management to understand the performance of the company and plan for future business operations.
The income statement will also show the selling and administrative costs incurred in the normal course of business. Both are the operating expenses of the business. After knowing the sum of operating expenses incurred, one will be able to work out the operating income of a business by calculating the difference between the gross profit and the operating expenses. This is the income that the company has generated from its core business activities.
Also, you may see interest income and interest expense in the income statement. Interest income refers to the interest earned by the company by keeping their excess cash in the bank accounts. As against, interest expense is the interest that the company needs to pay on the money that they have borrowed from the banks or financial institutions.
There will be a part that records the income before tax of the business too. This is the sum of money the company has earned from its operating and non-operating activities before including the sum of income taxes the business should pay. In some cases, people may choose to compare two companies by comparing their income before tax because their tax rates may not be the same.
Finally, net income is the line item that will appear as the bottom line in the income statement. The is the amount remaining after the company has added other revenues to it, as well as has deducted operating expenses, other expenses and income taxes from it. This is the final figure, and the accountant will transfer it to the company’s retained earnings.