Income Statement

This chapter will explain:

Why businesses need to keep accounting records such as income statements

Why profits are not the same as cash Why profits are important The differences between gross, net and

retained profit What the income statement contains

Any difference?Account

Accountant

Account Vs Accountant

I am studying IGCSE Accounting.When I was in Year 10, my

accounting teachers always ask us to close all the monthly

accounts. I think I am not going to become

an accountant one day!

Accounts. This refers to the financial records of a firm’s transactions

Accountants. They are the professionally qualified people who have responsibility for keeping accurate accounts and for producing final accounts

Account Vs Accountant

Final accounts. These are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business.(example: Income statement & Balance Sheet)

Final Accounts

Profit = Sales Revenue – Cost of making products

How a Profit is made?

Ways to increase surplus by:1.Increasing sales revenue more than costs2.Reducing costs3.Increasing sales and reducing costs.

a) Reward for enterprise

Why is profit important?

The profit gained can reward the owner due to his hardwork in running the business.b) Reward For Risk TakingThe profit gained can give back as dividend to shareholders due to their contribution of capital in the business.

Why is profit important?

c) Source of finance

d) Indicator success

The profits can kept aside as the retained profit or for business expansion.

When there’s an increase of profit, this can be a good sign for the business to move on.

Difference between Profit and Cash

Understanding Income Statement

Income statement- This is the document that records the income of a business and all costs that incurred to earn that income over a period of time (AKA Profit and Loss Account)

Format of Income Statement (Trading Account)

Sales Revenue = This is the income to a business during a period of time from the sale of goods and services

Cost of goods sold= This is the cost of producing or buying in goods actually sold by the business during a time period

Gross profit= This is made when sales revenue is greater than the cost of goods sold

Format of Income Statement (Trading Account)

Sales Revenue = This is the income to a business during a period of time from the sale of goods and services

Cost of goods sold= This is the cost of producing or buying in goods actually sold by the business during a time period

Gross profit= This is made when sales revenue is greater than the cost of goods soldGross Loss?

Format of Income Statement (Trading Account)

Trading Account= This shows how the gross profit of a business is calculated

Trading Account

Sales Revenue = This is the income to a business during a period of time from the sale of goods and services

Cost of goods sold= This is the cost of producing or buying in goods actually sold by the business during a time period

Gross profit= This is made when sales revenue is greater than the cost of goods soldGross Loss?

Sell Bread RollsExample of cost of goods sold?

SausagesBreadButterBread scrumbCooking oil

Raw materials

Sell Bread RollsSelling price?

RM_2.00 @ 100 bread rolls

Sales Revenue= RM 200

Sell Bread RollsSelling price?

RM_2.00 @ 100 bread rolls

Sales Revenue= RM 200

Cost of goods sold?

Sausages ??Bread ??Butter ??Bread scrumb ??Cooking oil??

Cost of goods sold= RM50

Gross Profit?

RM200 – RM50= RM150

Format of Income Statement (Profit and Loss Account)

Net profit= This is the profit made by a business after all costs have been deducted from sales revenue. It is calculated by subtracting overhead costs from gross profit.

Sell Bread RollsSales Revenue= RM 200

Cost of goods sold= RM50

Gross Profit = RM150

Add: IncomeLess: ExpensesSalary ElectricityWaterRental

Net Profit = RM 20

Other terms

Depreciation = This is the fall of value of a fixed asset over time.

Retained profit = This is the net profit reinvested back into a company after deducting tax and payments to owners , such as dividend.

Profit and Loss account

SalesLess: Cost of goods sold

Add: Income

Less: Expenses

Question:

Sales ?Cost of making sales 700Gross profit 300Overheads ?Net profit 100

Question:Calculate the P&L accountPing Yung has kept records of the sales and costs involved in running his bicycle shop:Purchases of bicycle to resell: $80 000Energy costs of running business: $10 000Advertising : $2 000Wages: $10 000Sales of bicycle :$150 000Rent on premises : $10 000

Trading and Profit & Loss account

SalesLess: Cost of goods sold

Gross profitAdd: Income

Less: ExpensesNet profit