Home » Accounting Explanation » Financial statements - Income Statement



Format of an Income Statement


Amount
Amount
Amount
Sales
Less: Sales return
         Sales discount
Net Sales

Less: Cost of goods sold
Opening stock or inventory
Add:  Purchases
Less: Purchase return
         Discount received
Add: Freight
         Carriage inward

Goods available for sale
Less: closing stock
Cost of goods sold
Gross profit on sales

Less: Operating expenses
        
         Selling expenses
         Salaries of sales wokers
         Advertisement expeneses
         Commission paid for sales
         Total selling expenses

         Administrative expenses
         Office salaries
         Rent of builing
         Depreciation expenes
         Insurance expenses
         Total administrative expenses
Total operating expenses
Income from operations


Less: Other expenses
         Dividend
         Interest paid
Total other expenses

Less: Other income
         Interest received
         Divident received
         Discount received
         Commission received
Total other income
       

2000
1000





2000
1000
1000
1000









500
500
1000



1000
1000
2000
1000










50,000

3000



10000
6000

3000

2000

15000
9000









2000






5000





1000
2000



1000
2000
3000
1000



47000











6000
41000















7000
34000





3000
31000





7000
Net Income


38000



The components of income statement are discussed below

Sales

Sales are the revenue against the sale of the products or services of a business. In case of a service business, there will be Income against Services Rendered instead of Sales

Cost of Goods Sold

Cost of goods sold is the expenses incurred in purchasing or manufacturing the products which a business is selling and any other necessary expense incurred in bringing the product in saleable condition.

Examples of these expenses are listed below:

  • Purchase price of raw material or goods sold
  • Tax expense and freight paid on the purchase of raw material or goods
  • Cost of carriage inward or transportation of purchased items or raw material
  • Wages paid to employees or labours to manufacture goods or to provide services
  • Other factory overheads incurred to convert raw material to saleable products

    Gross profit or loss

    Total sales of goods or services less cost goods sold or services rendered
    Gross profit or Gross loss = Sales – Cost of goods sold or services rendered

    Operating expenses

    Operating expenses are ongoing business expenses which are incurred in connection with main operations or activities of the business

    There are two main types of operating expenses

    • Administrative Expenses
    • Selling Expenses

    Administrative expenses 

    Expenses which are incurred for the administration of organization and these expenses are not directly related to a specific function (like selling or manufacturing) of the organization

    Examples of administrative expenses include:

    • General office expenses
    • Payment of utility bills
    • Repair & maintenance of office equipment and vehicle.
    • Payment of rent
    • Salaries of employees

    Selling Expenses

    Selling expenses are directly related to sales of goods or services. These are the expenses which are either incur for the marketing or advertisement of goods and services or for the distribution of goods and services to customers

    Examples of selling expenses include:

    • Transportation cost or carriage outward for selling goods or services
    • Advertisement expenses
    • Salesperson's commission
    • Salaries of employees that are directly involve in selling goods or services


    Other incomes

    Other incomes are the gains or revenues from the activities which are not the normal course of business or normal operations of business

    Examples of other incomes include:
    Interest received on loan, dividends received, commission from sales of other firm’s goods, profit on profit and loss sharing account

    Other expenses

    Other expenses are the losses and expenses that a company incurs on activities which are not the normal course of a business or normal operations of a business

    Examples of other incomes include:
    Interest paid on loan, commission paid, dividends paid, discount allowed other debts etc.


    We can summarize Income statement in a mathematical equation

    Net_Profit/loss=(Sales-Sales return-Discount allowed)-[opening stock+(purchases-Purchases return-Discount received)-closing stock]-Operating expenses-other expenses+other Incomes