Income Statement – a.k.a. Profit and Loss Statement

The Income Statement, also referred to as Profit and Loss (P&L) Statement, shows an entity's results of operations for a particular period.

It presents an entity's income and expenses, and the resulting net income or net loss.

This lesson presents an Income Statement example and provides important points you need to know in preparing and understanding the said report.

Income Statement Example

Here is a sample income statement of a service type sole proprietorship business. Let us name the company Strauss Printing Services. All amounts are assumed and simplified for illustration purposes.

Strauss Printing Services
Income Statement
For the Year Ended December 31, 2014
       
Service Revenue $ 160,000
Less: Expenses    
  Salaries Expense $ 40,000  
  Supplies Expense 26,100  
  Rent Expense 20,500  
  Utilities Expense 11,300  
  Depreciation Expense 5,000 102,900
Net Income $   57,100

Explanation and Pointers

  1. An income statement shows the net income or net loss of a business. This is achieved by deducting all expenses from all income.
  2. A typical income statement starts with a heading which consists of three lines. The first line presents the name of the company; the second describes the title of the report; and the third states the period covered in the report.
  3. Notice that the third line is worded "For the Year Ended..." This means that the income statement presents information for a specific span of time. In the above example, the period covers 1 year that ends on December 31, 2014. Hence, the amounts presented in the report are income and expenses from January 1, 2014 to December 31, 2014.
  4. Income accounts are presented before expenses. In the above statement, the income account is Service Revenue. Other income accounts for service type businesses include Professional Fees, Rent Income, Tuition Fees, etc.
  5. Expenses are presented after the income accounts. It is a good practice to arrange expenses according to amount (largest to smallest). Some users who are interested in the company's expenses are concerned about the size of each expense. Arranging the expenses from largest to smallest results in a more useful and organized report. Nonetheless, Miscellaneous Expense or Sundry Expense is presented last.
  6. If income exceeds expenses, there is a net income. If expenses exceed income, there is a net loss. Notice how computations are presented. A single line is drawn every time an amount is computed. The resulting amount is double-ruled when it is no longer followed by any operation. For example, $57,100 (the net income).
  7. The income statement complies with the accrual basis of accounting. Income is recognized when earned regardless of when collected. Expenses are recognized when incurred regardless of when paid.
    This means that income and expenses presented in the income statement have been earned and incurred, respectively. Nonetheless, it does not mean that they have all been collected or paid.
  8. International accounting standards suggest that companies should present other comprehensive income in their financial statements. A Statement of Comprehensive Income shows the contents of an income statement followed by a list of "other comprehensive income".
  9. Other comprehensive income includes gains and losses that cannot be reported as profit and loss, such as unrealized gains and losses, and revaluation surplus. This is taken up in higher financial accounting studies.
  10. When the company does not have other comprehensive income, the contents of the income statement and the statement of comprehensive income are the same. In any case, international accounting standards favor the use of the title "Statement of Comprehensive Income".

Statement of Comprehensive Income

Here's a sample Statement of Comprehensive Income, which includes other comprehensive income. This topic is taken up in higher accounting so you need not worry about it yet.

Strauss Printing and Publishing, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2014
       
Service Revenue $ 160,000
Less: Expenses    
  Salaries Expense $ 40,000  
  Supplies Expense 26,100  
  Rent Expense 20,500  
  Utilities Expense 11,300  
  Depreciation Expense 5,000 102,900
Net Income $   57,100
   
Net Income $   57,100
Other Comprehensive Income    
  Revaluation Surplus $ 20,000  
  Unrealized Translation Gain 10,200 30,200
Total Comprehensive Income   $   87,300
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