Chapter 20
Statement of Profit/Loss
Or
Income Statement
:Definitions to Know )1
.Accounts are the financial records of a firm's transactions
Accountants are professionally qualified people who are responsible for keeping accurate accounts
.and producing the final accounts
Financial accounts are produced at the end of the financial year and provide details of the profit or
.loss made during the year and the value of the business
Note: limited companies are required by law to publish their final accounts and these accounts are
.much detailed than unincorporated businesses accounts
?Why is profit important )2
?Why profit is important Explanation
Reward for enterprise Successful entrepreneurs have many important
qualities and characteristics and profit gives
.them a reward for these
Entrepreneurs and Investors take risks when
Reward for risk taking they provide capital to a business – profit is a
reward for risk taking (dividends for
shareholders). Profit also provides incentives to
business owners to make their business more
profitable and to investors to put more capital
.into profitable business
Profits after paying dividends (retained profit)
Source of finance are very important source of finance for
.business- this allows expansion
When the business is very profitable, this gives a
Indicator of success signal for entrepreneurs and investors that the
.investment made would be profitable
Note: In the public sector, profit might be important it is used a source of finance to develop the
.state-owned business and make it more efficient
In the social enterprises, profit is also important to survive and to reinvest it to make new
.enterprises, but it is not the main objective
.Understanding Statement of Profit/loss or income statement )3
Important
Definition of Statement of Profit/loss : A financial record that records the revenue, costs, and profit
.over a period of time usually a year
MPORTANT NOTE: Managers can use the structure of the income statement to help them in
making decisions based on profit calculation. Such as choose which of two new products to launch
.or choose between two locations, this can be done by making a forecast income statement
:Definitions to study
Gross profit: The difference between revenue earned from selling the products and the cost of
.making these products
Sales revenue is the income to a business during a period of time from the sales of goods and
.services
Cost of goods sold or cost of sales: The direct expense of producing or buying in the goods actually
.sold by the business during a specific period of time. Such as raw material cost and labour cost
Expenses: Also known as overhead, these are the costs that are incurred by the business that are not
directly related to the production or selling of goods. Such as insurance, transportation expenses,
interest on loans, and marketing costs
Note: - Gross profit does not make any allowance for overhead costs or expenses
.Cost of goods sold is necessarily the same as the total value of goods bought -
:Gross Profit )4
Income Statement for XYZ The business/company name
limited should be shown clearly
For the year ending 31/10/2014 The time period covered by the
income statement must be
.shown
Sales revenue The value of the goods sold during
a year
Cost of goods sold This is the variable cost (materials
and labour costs) of making the
.goods sold
Gross Profit Sales revenue – cost of goods sold
Note: the Gross Profit is not the final profit and the income statement above is incomplete because
:important items are missing
Expenses -
.Taxes on profit paid by the company (corporate tax) -
.Payments of dividends for owners and shareholders -
Net Profit )5
Income Statement for XYZ The business/company name
limited should be shown clearly
The time period covered by the
For the year ending 31/10/2014 income statement must be
.shown
The value of the goods sold
Sales revenue
during a year
This is the variable cost
Cost of goods sold (materials and labour costs) of
.making the goods sold
Gross Profit Sales revenue – cost of goods
sold
Gross profit $32000
Non-trading income + $5000
interest received from savings ( $37000
)accounts
:Less expenses
Wages and salaries -
Electricity - $12000
$6000
Rent -
$3000
Depreciation expense -
$5000
advertising expenses -
$5000
$31000
Net profit $6000
:Definitions to study
Net profit: The profit made by a business after all costs have been deducted from sales revenue, it is
.calculated by subtracting overhead costs from the gross profit
.Depreciation is the fall in value of a non-current asset over time
:The Income statement for limited companies will also contain
corporation tax paid on the company's net profit -
the dividends paid out to shareholders -
retained profit left after these two deductions -
.result from the previous year to allow comparison -
Income Statement for XYZ
limited
For the year ending 31/10/2014 )$000(
Sales revenue $1250
-
Cost of goods sold $900
=
Gross Profit $350
less expenses including interest $155
paid
net profit before tax = $195
Less corporate tax $35
net profit after tax = $160
Less dividends $120
retained profit = $40