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What Is Income Statement?
The income statement is one of the financial statements that are involved to define the financial standing of the organisation at a specific time period. Balance sheet cash flow along with the income statement helps your organisation to understand the financial position of the company. The income statement is also known as the statement of profit and loss or a statement of revenue and expenses. The prime objective of the income statement is to state the revenues and expenses of the organisation during a particular time.
Dealings of Income Statement
Income statement deals with the four important items that are expenses, revenues, gains, and losses. The income statement doesn’t differentiate between the cash or non-cash items. The very starting point of the income statement comes from the details of sales which help to compute the income of the organisation known as the net revenue. Let’s see in detail revenues and gains along with the expenses and losses throughout the process of the income statement.
Revenues
The following are the types of revenues covered in the income statement;
Operating Revenues
Operating revenues come from the primary activities of the organisation. These primary activities are entirely dependent on the nature of the organisation or business. If the nature of business is all about the sale of the product, then sales are the primary activities of the firm, and so if they are manufacturers of the products. These revenues are earned in exchange for the services of selling the required product.
Non-Operating Revenues
Non-operating revenues are considered as the revenues generated through the non-operational activities of the organisation. In simple words, they involve the non-core operations of the business. These sources of income can be through other factors rather than the primary activities. This may include interest from the fixed deposits of the organisation bank account or rental income through the land of business. It can be an income by providing certain advertisements through your business property.
Expenses and Losses
They are considered as the cost of the business to run their operations. They are further divided into two categories primary activity expenses and secondary activity expenses. Let’s see one of them in detail.
Primary Activity Expenses
Primary activity expenses are considered as expenses which are incurred to earn the operating revenue from the business or an organisation. Primary activity expenses include administrative and general expenses along with the cost of goods sold depreciation, amortization, and many others. The primary activity expenses are sales, commissions, expenses for utility, salaries, transportation, and many other things.
Secondary Activity Expenses
Secondary activity expenses are all about the non-core activities of the business or an organisation, such as interest payable for the loans.
Structure and Sample of Income Statement
Let’s see a sample of the income statement for the best understanding of the structure and the procedure throughout the writing.
| 2019 | 2018 | |||
| Gross turnover | 8,149,662,345 | 8,145,370,198 | ||
| Sales returns | 39,628,778 | 35,101,278 | ||
| Sales tax | 5,915,811 | 6,254,976 | ||
| Discounts | 6,241,205 | 4,694,134 | ||
| (51,785,794) | (46,050,388) | |||
| 8,097,876,551 | 8,099,319,810 | |||
| Cost of goods sold | (7,598,174,304) | (7,634,695,886) | ||
| Gross profit | 499,702,247 | 464,623,924 | ||
| Distribution expenses | (343,668,990) | (330,646,193) | ||
| Administrative expenses | (150,134,640) | (126,590,890) | ||
| Other operating expenses | (1,713,990) | (6,191,152) | ||
| Other income | 67,652,131 | 66,327,727 | ||
| Operating profit | 71,836,758 | 67,523,416 | ||
| Finance cost | (4,564,551) | (4,355,098) | ||
| Profit before taxation | 67,272,207 | 63,168,318 | ||
| Taxation | (26,470,777) | (25,353,378) | ||
| Profit after taxation | 40,801,430 | 37,814,940 |
Understanding the structure of the income statement can help students to grasp the concepts effectively.
What Are the Uses of Income Statement?
One of the main objectives of the income statement is to provide the details of activities and profitability of the company to the stakeholders while on the other hand it also provides internal Insight of the organisation so that managers can match different businesses and different sectors within the organisation. there are many cases with the organisation, where this statement is required for the internal use of organisation. this helps the top management to understand the deeper insights of various operations and progress throughout the year.
One of the uses of the income statement is that it is helpful for the top management to make decisions effectively and efficiently. without evaluating income statement along with other financial statements, it is impossible for the top management to make decisions significantly.
Conclusion:
The Income statement is the most effective and important part of the financial statement that helps the organisation to see and evaluate the financial standings from both internal and external points of view.