Income Statement

The income statement is an important component of a set of financial statements. It measures the performance of a business during an accounting period by calculating one or more of the following:

  1. Gross Profit
  2. Operating Income
  3. Net Income
  4. Earnings per Share (EPS)

There are four basic elements of a typical income statement. These are:

Revenues: Revenues are the earnings from usual business activities. In most cases, revenues are earned from sales of goods and services.

Gains: Gains are the enhancements in the assets or the reductions in liabilities caused by activities outside the usual course of business and which are eligible to be recorded according to acceptable accounting practices.

Expenses: Expenses include consumption of assets or the creation of liability against the business in the course of normal business activities.

Losses: Losses are the reductions in assets or the enhancements in liabilities caused by activities other than those in the main course of business.

Example and Format

Income statement can be prepared in either of two formats namely single-step income statement and multi-step income statement. The following example shows a simple single-step income statement. It has been prepared from the adjusted trial balance of Company A.

Company A
Income Statement
For the month ended Jan 31, 2011
 
Sales$85,600
Less: Expenses: 
Wages Expense$38,200 
Supplies Expense18,480 
Rent Expense12,000 
Miscellaneous Expense3,470 
Electricity Expense2,470 
Telephone Expense1,494 
Depreciation Expense1,100 
Interest Expense150 
Total Expenses−77,364
Net Income$8,236

There are certain incomes and expenses which are not reported on income statement but are credited or debited directly to equity, for example, the gain or loss on revaluation of fixed assets, unrealized gains on investments, foreign currency gains and losses, etc. A statement of comprehensive income includes all these debits and credits to equity besides the contents of a normal income statement.

Written by Obaidullah Jan