An income statement, or known as profit and loss statement, shows the financial condition of a company over a duration, probably annually for reporting tax. Instead of giving an image of the financial status of the company, the income statement indicates the financial behaviour of the company (Also see What is a Chart of Account?). The management is able to change the financial direction of the company by evaluating the income statement every month, some accountants (Also see Getting Ready as An Ambitious Accountant) may even use advance financial ratio for assessment.
The terms below are used in the income statement:
Revenue is the overall sales according to the accrual accounting in a specific duration. For example, a client purchased a water filter machine with setup services near end of March using a MASTER, and the accounting system records the sales. Nevertheless, the money transaction could only be completed by MASTER in early April, but the sales would still be acknowledged as the March’s revenue.
Cost of Items Sold
Cost of items sold referred to the overall expenses incurred on services or items of the sales. There would be a direct expense consists of the expense for the water filter unit from the supplier and also other setup products like wires, tubing and so on. There is labour expense too for the setup work unless it can be measured, will be recorded as wages and income under Expenses.
Gross profit is the profit from the revenue substrates the cost of the items sold in a certain period.
The expenses are the running expenses that are indirectly contributing to the services or goods and not recorded under the cost of items sold. For instance, the rental paid on the company properties, gross worker salary, maintenance of machinery or equipment, marketing costs, insurance coverage, shipping charges, transportation expenditures (public transportation) and other company’s operation expenses (Also see Impairment of Fixed Asset).
Tax is the approximated tax payable in a certain duration. If a company that reveals losses in the income before tax, it might still incur tax payable (Also see Tax Avoidance and Tax Evasion).
Other Income and Expenses
This includes the non-running expenses and income, such as the gain from the financial investments and the interest income from the cash balances in the bank.
Operating Profit or Income
That is the profit gained from the core activities operated by the company, not consisting of the other income and expenses.
In general, the income statement helps the lenders and the investors to compare to the industry-standard of the company and the rivals over a couple of previous year information, as it could be examined whether the company is beneficial for returns on the investment (Also see Are Accounting and Bookkeeping the Same?). Having a precise bookkeeping record, income statement could be created easily every month. Please contact any accounting service in Singapore to start setting up your bookkeeping system today.