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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
- Cost of sales: $45,000
- Gross profit: $35,000
- Discount received: $80,000
- Carriage outwards: $800
- Administrative expenses: $4,000
- Staff salaries: $4,000
- Directors’ salaries: $5,000
- Audit fee: $1,000
- Depreciation: $4,600
- Loan interest: $5,000
- Net profit before tax : $10,400
- Tax: $5,000
- Net profit for year: $5,400.
For the trial balance shows: “Sales revenue: $80,000″.
Cost of sales = Opening inventory + Purchase + Carriage inwards – Closing inventory = $10,000 + 49,000 + 1,000 – 15,000 = $45,000.
Gross profit = Revenue – Cost of sales = $80,000 – 45,000 = $35,000.
For the trial balance shows: “Discount received: 80,000″.
For the trial balance shows: “Carriage outwards: 800″.
For the trial balance shows: “Administrative expenses: $4,000″.
For the trial balance shows: “Salaries (excluding directors): $4,000″.
Adjustments are required for: directors’ salaries not yet paid $5,000.
Adjustments are required for: accrued audit fee $1,000.
For the trial balance shows: “Loan interest paid: $5,000″.
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.
Adjustments are required for: tax for the year $5,000.
Net profit for year = Net profit before tax – tax = $10,400 – 5,000 = $5,400.
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