Key Components Of An Income Statement

2019/02/25

Income statement also known as profit and loss account represents an integral part of any company’s business operations. It lists all the relevant expenses and incomes of a business to finally indicate the profitability for a particular period

All expenses are debited while all incomes are credited. Common components of an income statement are provided below.

a) Opening and closing inventory.

b) Direct expenses: Expenses which are mainly incurred in connection with the procurement of raw material and production of goods.

c) Revenue: Generally indicates sales made by the company during the relevant period.

d) Gross profit: Indicates the difference between net sales and cost of goods sold. A measure of how efficiently production is managed.

e) Operating/Indirect expenses: Generally indicates indirect expenses incurred to facilitate routine operations. Common examples include salary to employees, office rent, audit fees, postage and so on.

f) Depreciation on fixed assets as per the accounting policy followed by the company.

g) Operating profit before interest and income tax: Figure arrived at after deduction of operating expenses from gross profit.

h) Other incomes: Can be in the form of interest earned from investments and deposits.

i) Other expenses: Interest paid on any loan /debt taken for business purposes.

j) Operating profit before income tax: Figure arrived at after adding other incomes and deducting other expenses from operating profit before interest and income tax.

k) Taxes.

l) Net profit/loss: Simply the difference between debit and credit side of income statement.

m) Various adjustments are also required to be made to reflect accurate profitability. For instance, an adjustment may be required for any salaries outstanding at the end of year.

It is important to note, that income statement is generally prepared on accrual basis, that is, any expenses paid or to be paid and similarly income received or due to be received are reported in the statement. Further any expense paid or income received in advance has to be adjusted accordingly.

Income statement is an important part of a company’s financial statements. It reflects the financial condition of a company in relation to a specific period. Period can be a month, quarter or year. Even year to year comparisons can be made to observe changes. Income statement can act as a powerful tool for making in depth analysis to highlight areas of improvement. Components of income statement are used in the calculation of various types of ratios which can further be used for detailed analysis of financial performance.

Investors are particularly interested in income statement along with other financial statements. Income statements sometimes include a calculation known as earnings per share (EPS). EPS is arrived at after diving net income by the total number of outstanding shares. This helps in gaining an understanding on how much money company’s shareholders (in respect of their shareholdings in the company) will get in case entire net income is distributed. Higher EPS can act as a highly motivating factor for investors willing to invest in a company.

Irrespective of the size and nature of operations, every business should maintain proper records of all its expenses and incomes. Income statement should be prepared in line with the accounting principles and also in accordance with the disclosure requirements mandated by regulatory authorities.

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