Income statement

Introduction:
 The income statement shows the gross profit and net profit of the company. Details of
how the net profit is split up between dividends to shareholders and retained profit.
 So income statement records the revenue, costs and profit (or loss) of a business over a
given period of time.
 An income statement is divided into three parts
o The trading account
o Profit and loss account
o Appropriation account
Trading account:
 Shows how gross profit is made from trading activities
 Gross profit is calculated by deducting cist of sales from sales revenue
 Sales revenue is the total value of sales made during the trading period
o Sales revenue= selling price X quantity sold
 Cost of sales (or cost of goods sold) is the direct cost of purchasing the goods that were
sold during the financial year.
o Cost of goods sold = (opening stock+ purchases)- closing stocks
o Cost of goods sold is the direct cost only.

Profit and loss account:

 This section calculates both the net profit (or profit before tax interest and tax) and the
profit after tax of the business.
o Net profit (operating profit): gross profit minus overhead expenses
o Profit after tax: operating profit minus interest costs and corporation taxes.
 So from the gross profit the overheads (indirect costs) are deducted to get the net profit
o Overhead expenses can be: rent and business rates, management salaries,
lighting costs and depreciation.

Appropriation account:
 This is the final section of an income statement
 It shows how profit after tax are distributed between the owners in the form of
o Dividends (the share of profits paid to the shareholders as a return for investing
in the company)
o Retained profit (the profit left after all deductions, including dividends, have
been made. This is ploughed back into the company as a source of finance)
Uses of income statement:
 To compare the performance of the business over time and with other firms
 To compare the actual profit data with expected
 To convince lenders and creditors for gathering finance
 To convince prospective investors

Conclusion:
 However, the data contained in published accounts can be window dressed (presenting
the company accounts in a way to flatter the business performance), thus should be used
with caution by stakeholders.
 Also the quality of profit should be a concern, before considering a firm to be called
really profitable.
o Low quality profit: one off profit that cannot easily be repeated or sustained
o High-quality profit: profit that can be repeated and sustained.