Income Statements

Accounts are the financial records of a firm’s transactions.

Accountants are professionally qualified people who have responsibility for keeping accurate accounts and for producing the final accounts.

Final accounts are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business. 

Profit

Profit = Revenue – Cost of making products

Why is profit important?

Profit is important to private-sector businesses for the following reasons:

1. Reward for enterprise
2. Rewards for risk-taking (investors)
3. Source of finance
4. Indicator of success

Income Statement

An income statement is a financial statement that records the income of a business and all costs incurred to earn that income over a while (usually a year). It is also known as a profit and loss account. 

Revenue

The revenue is the income to a business during a period of time from the sale of goods or services. 

Revenue = price of good * number of units sold

Cost of sales 

Cost of sales is the cost of producing or buying in the goods actually sold by the business during a time period. 

Gross profit

Gross profit is made when revenue is higher than the cost of sales. Gross profit does not account for any overhead costs.

Gross profit = revenue – cost of sales

A trading account shows how the gross profit of a business is calculated.

A trading account is not a complete income statement because:

1. Other costs of running the business are not present here.

2. Taxes paid on income are not calculated

3. Profit shared with owners is not deducted.

Net Profit 

Net profit is the profit made by a business after all the costs have been deducted from revenue. It is calculated by subtracting overhead costs from gross profits.

Depreciation

Depreciation is the fall in the value of a fixed asset over time. Each year, this fall in value is recorded as an expense on the income statement.

Retained Profit

Retained profit is the net profit reinvested back in the business, after deducting taxes and payments to owners, such as dividends.

Parts an income statement may also contain:

1.   Corporation tax

2.   Dividends paid out to shareholders

3.  Retained profits left after these deductions

4.  Results from the previous year to allow for easy comparison

Using income statements in decision-making

Managers use income statements and cash flow forecasts to make decisions based on long-run profit calculations.