Income statement also known as profit and loss statement is a financial report shows the income earned and expenses incurred in generating the income in particular time period.  It is prepared usually at the end of the year. However, it can also be prepared at the end of each month or quarter to know the exact amount of net income or net loss for that period. Moreover, it is also prepared at the end of a project.

This should be noted that income statement contains company sales and expenses, gains and losses, net income and earnings per share, while nothing is mentioned regarding assets and liabilities of the business.

Format and Example

Basically we have two income statement formats prepare by accountants.

As the name suggests the single step statement where incomes and expenses are presented into one step and there is no classification of incomes and expenses reported. Due to limited information this format is not useful for external users.

A multi-step statement is a financial report which contains business operations related to sales, cost of goods sold, both operating and non-operating expenses, net income etc. This format provides more useful and relevant information to financial users.

Income statement expenses can also be presented by the nature or function of the expense. It has a heading of company name, statement title and reporting time period.

Why We Prepare Income Statement

As we have discussed above that the main purpose of preparing income statement is to determine the net income or net loss whatever the case may be for a specific period of time which may be a year, half year, quarter or even a month. However, this statement is prepared carefully can also serve the following additional purposes:

1. Gross profit on sales can easily be determined. Sales are recorded net of sales returns if any and all the cost / expenses directly attributable to that sales are subtracted. If the sales amount is greater than directs expenses which is happened in most of the cases, the resultant figure is called ‘gross profit’. If the amount of direct expenses exceeds the amount of sales, the results are called ‘gross loss”.
2. It also shows the amounts, level and trends of operating expenses. Operating expenses include selling, distribution, administrative and other expenses relevant to the operations of the entity. With the help of financial statement, the relation of these expenses with sales can easily be measured. This would definitely help on controlling these costs.
3. From the information presented this financial statement, certain profitability ration can be calculated with no difficulty. These ration when worked out properly are used in decision making particularly concerning the operation of entity.

Forms

Remember, income statement can be prepared in any of the following forms, without harming the actual purpose of this statement i.e. showing operating results income loss.

Report Form

In this form revenues (sales) are recorded at the top and all the expenses are deducted from it. The resultant figure is called net income or net loss. Revenues are classified into various groups like revenue from sales, other sources, other income, mark-up income etc. accordingly expenses are also classified into various meaningful groups like selling, distribution, administrative expenses etc.

Account Form

Account form income statement is often called Profit and Loss Account. This is prepared in T shape having both credit and debit sides. Revenues are recorded on the Credit sides while expenses are recorded on the debit side of the account. The results or balance of such account is shown as net income or net loss.