Income Statements
What are accounts and why are they necessary?
Accounts are the financial records of a firm’s transactions
Accountants are the professionally qualified people who have the
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 and loss made over the year and the worth of the
business
Limited companies are required by law to publish their final accounts
Recording accounting transactions
Too long and cumbersome to be written out by hand, and so are stored
on computers. Computer files store records of all financial transactions
and information can be printed out when required
How a profit is made
Profit=sales revenue−cost of making products
Why is profit important?
Why profit is Explanation
important
Reward for Successful entrepreneurs have many important
enterprise qualities and characteristics and profit gives them a
reward for these
Reward for risk Entrepreneurs and investors take considerable risks
taking when they provide capital to a business-profits
reward them for taking these risks by allowing
payments to be made
These payments provide incentives: to business
owners to try make their business even more
profitable; to investors to put more capital into a
profitable business
Source of finance Profits after payments to owners (retained profit)
are a very important source of finance for the
business-this allows for expansion
Indicator of success When some businesses are very profitable, other
businesses or new entrepreneurs are given a signal
that investment inti producing similar goods or
services would be profitable.
Understanding income statements
An income statement is a document that records the income of a
business and all costs incurred to earn that income over a period of
time. It is also known as a profit and loss account
A gross profit is made when sales revenue is greater than the cost of
goods sold
The sales revenue is the income to a business during a period of time
from the sale of goods and services
The cost of goods sold is the cost of producing or buying in the goods
actually sold by the business during a time period
A trading account shows how the gross profit of a business is
calculated
Gross profit
Gross profit is calculated before costs are considered
Gross profit =sales revenue−cost of goods sold
Gross profit does not make any allowances for overhead costs or
expenses
Cost of goods sold is not necessarily the same as the total value of
goods bought by the business
In a manufacturing business, rather than a retailing one, labour
costs ate directly incurred in making the products sold and will also
be deducted before arriving at the gross profit total
The gross profit is not the final profit for the business because of all
the other expenses that have to be deducted
Costs such as salaries and utilities need to be subtracted from the
gross profit
Net profit
Net profit is the profit made by all businesses after all the costs have
been deducted from sales revenue. It is calculated by subtracting
overhead costs from gross profits
Net profit will also include any non-trading income such as rent
Depreciation is the fall of the value of a fixed asset over time
Retained profit is the net profit reinvested back into the company after
deducting tax and dividends
The income statement for limited companies will contain:
Corporation tax paid on the company’s net profit
The dividends paid out to shareholders
The retained profits left after these two deductions
Results from the previous year to allow for easy comparison