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Perhaps you need more than 15 mins to read the income statement example and master it.

Income statement reflects the operational results of the company over a period of time. It matches the income and the expenditure in the same period, and you can count the net profit in the period.

Income statement example (by function):

The income statement accounts:

• Revenue



• Cost of sales



• Gross profit



• Other income



• Distribution costs



• Administrative expenses



• Other expenses



• Profit from operations



• Finance costs



• Share of profit of associates



• Profit before tax



• Income tax expense



• Profit after tax



• Minority interest



• Net profit for the period.

Example

A trial balance of Aspring, a limited liability company, at 31 December 20X9:

Adjustments are required for:

• inventory at 31 December 20X9, at cost $15,000
• directors’ salaries not yet paid $5,000
• tax for the year $5,000
• depreciation charge for the year $4,600
• accrued audit fee $1,000
• creation of a plant replacement reserve of $1,000.

Now, preparing the income statement.

Solution

Workings

• Sales revenue: $80,000

For the trial balance shows: “Sales revenue: $80,000″.

• Cost of sales: $45,000

Cost of sales = Opening inventory + Purchase + Carriage inwards – Closing inventory = $10,000 + 49,000 + 1,000 – 15,000 = $45,000.

• Gross profit: $35,000

Gross profit = Revenue – Cost of sales = $80,000 – 45,000 = $35,000.

• Discount received: $80,000

For the trial balance shows: “Discount received: 80,000″.

• Carriage outwards: $800

For the trial balance shows: “Carriage outwards: 800″.

• Administrative expenses: $4,000

For the trial balance shows: “Administrative expenses: $4,000″.

• Staff salaries: $4,000

For the trial balance shows: “Salaries (excluding directors): $4,000″.

• Directors’ salaries: $5,000

Adjustments are required for: directors’ salaries not yet paid $5,000.



• Audit fee: $1,000

Adjustments are required for: accrued audit fee $1,000.



• Depreciation: $4,600



• Loan interest: $5,000

For the trial balance shows: “Loan interest paid: $5,000″.

• Net profit before tax : $10,400

Net profit before tax = Gross profit + Other income – Distribution costs – Administrative expenses – Other expenses – Finance costs + Share of profit of associates = $35,200 – 400 – 800 – 4,000 – 4,000 – 5,000 – 1,000 – 4,600 – 5,000 = $10,400.

• Tax: $5,000

Adjustments are required for: tax for the year $5,000.



• Net profit for year: $5,400.

Net profit for year = Net profit before tax – tax = $10,400 – 5,000 = $5,400.

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We know the meaning of revenue: revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of the enterprise. According to the accrual, before being recognised and reported, revenue must be earned and realised, and it must be capable of being verifiably measeured.

Two conditions must be met before revenue can be recognised and reported in the income statement.

• The revenue must be earned, i.e. the activities undertaken to create the revenue must be substantially completed.
• The revenue must be realised, i.e. an event has occurred which significantly increases the likehood of conversion into cash. This also means that the revenue must be capable of being verifiably measured.

The date of the sale transaciton is the moment that the revenue is recognised in the financial statements.

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Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of the enterprise.

The term revenue can apply to:

1. the supply of goods
2. the provision of services
3. rent from the hire of equipment or property
4. interest or dividends received on a trade investment.

Revenue from the sale of goods can be recognised when conditions have been met relating to:

1. transfer of significant risks and rewards of ownership
2. seller’s giving up of managerial involvement or control over the goods
3. the amount of revenue
4. economic benefits from the transaction
5. the costs incurred.

Revenue from services ma be recognised only when certain conditions have been met relating to:

1. the amount of revenue
2. economic benefits associated with the transaction
3. the stage of completion of the transaction at the balance sheet date
4. the costs incurred.

Revenue from interest, royalties and dividends may be recognised when it is probable that the benefits of the transaction will flow to the enterprise, and the amount of the revenue can be measured reliably.

1. interest should be recognised on a time proportion basis that takes into account the effective yield on the asset
2. royalties should be recognised on the accrual basis in accordance with the substance of the relevant agreement
3. dividends should be recognised when the shareholder’s right to receive payment is established.

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Revenue should be measured at the fair value of the consideration received or receivable.

1. If the sale is a cash sale, then the revenue is the immediate proceeds of sale. Allowance may be made for expected returns.
2. If the sale is a credit sale, i.e. a sale for a claim to cash, then anticipated cash is revenue.

For example, if the anticipated collectable value on sales $1,000 is $950, current practice, would show $1,000 as revenue and $50 as an expense in the income statement.

If the inflow of cash is deferred, the fair value of the consideration may be less than the nominal amount receivable. The difference between the fair value and the nominal amount of the consideration si recognised as interest revenue in the period or periods over which the credit is granted.

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An enterprise should disclose:

1. the accounting policies adopted for the recognition of revenue
2. the amount of each significant category of revenue recognised during the period: the sale of goods, the rendering of services, interest, royalties, dividends
3. the amount of revenue arising from exchanges of goods or services included in each significant category of revenue.