Accounting Income Statement

Accounting Income Statement

Saket Modi

20 years: Chartered accountant & educator

The income statement shows an entity’s sources of revenue, expenses incurred and the resulting profit or loss for the period, usually one year. In the fourth video of this series, Saket highlights what is included within the income statement, and the different ways of presenting the information.

The income statement shows an entity’s sources of revenue, expenses incurred and the resulting profit or loss for the period, usually one year. In the fourth video of this series, Saket highlights what is included within the income statement, and the different ways of presenting the information.

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Accounting Income Statement

6 mins 24 secs

Key learning objectives:

  • Outline the items of income and expenses presented in the income statement

  • Understand how the profit or loss figure is arrived at

  • Identify the different presentation formats of the income statement

Overview:

The income statement shows an entity’s sources of revenue, expenses incurred and the resulting profit or loss for the period, usually one year. It is also referred to as the Statement of Financial Performance. There are different formats for presentation of revenue and expenses.

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Summary

What are the items of income and expenses presented in the income statement?

The top line in the income statement is the revenue earned by the entity. It is also referred to as turnover or sales. There are direct costs and general overheads incurred in earning the revenue, and these are shown as part of the expenses. The most common income statement items include:

  • Revenue (or turnover or sales)
  • Cost of sales
  • Gross profit
  • Operating expenses (excluding depreciation and amortisation)
  • EBITDA (earnings before interest, taxation, depreciation and amortisation)
  • Depreciation and amortisation
  • EBIT (earnings before interest and taxation)
  • Finance costs
  • Profit before taxation
  • Taxation
  • Profit after taxation or net income

Finance income or gain on sale of assets are shown as separate line items as they do not form part of the normal operating activities of an entity.

How is the profit or loss figure arrived at?

The net profit or loss figure, also referred to as net income is arrived at by deducting total expenses from total revenue.

  • If Total revenue > Total expenses, it means the entity has earned a profit for the period.
  • If Total expenses > Total revenue, it means the entity has incurred a loss for the period.

The income statement may also show gross profit (revenue less cost of sales) and operating profit which is the earnings from the day-to-day operating activities of the entity.

What are the different presentation formats of the income statement?

The income statement may also be presented in another format where all items of revenue and other income are shown together as also all of the expenses. The expenses are classified by nature rather than function.

Banks generally present information about income and expenses in a different format to provide more relevant and reliable information about net interest income or margin.

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Saket Modi

Saket Modi

Saket is a financial trainer and consultant based out of London. He specialises in advanced accounting, financial reporting and financial analysis, particularly with regards to International Financial Reporting Standards (IFRS), International Public Sector Accounting Standards (IPSAS) and Financial instruments.

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