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Accounting - The Profit & Loss Account (or Income Statement)

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Income statement (overview)

The income statement is a historical record of the trading of a business over a specific period (normally one year).  It shows the profit or loss made by the business – which is the difference between the firm’s total income and its total costs.
The income statement serves several important purposes:

  • Allows shareholders/owners to see how the business has performed and whether it has made an acceptable profit (return)
  • Helps identify whether the profit earned by the business is sustainable (“profit quality”)
  • Enables comparison with other similar businesses (e.g. competitors) and the industry as a whole
  • Allows providers of finance to see whether the business is able to generate sufficient profits to remain viable (in conjunction with the cash flow statement)
  • Allows the directors of a company to satisfy their legal requirements to report on the financial record of the business

The structure and format of a typical income statement is illustrated below:

Example Business Ltd

 

 

Income Statement

20X1

20X0

Year Ended 31 December

£'000

£'000

 

 

 

Revenue

21,450

19,780

Cost of sales

13,465

12,680

Gross profit

7,985

7,100

Distribution costs

3,210

2,985

Administration expenses

2,180

1,905

Operating profit

2,595

2,210

Finance costs

156

120

Profit before tax

2,439

2,090

Tax expense

746

580

Profit attributable to shareholders

1,693

1,510

The lines in the income statement can be briefly described as follows:

Category

Explanation

Revenue

The revenues (sales) during the period are recorded here.  Sometimes referred to as the “top line” – revenue shows the total value of sales made to customers

Cost of sales

The direct costs of generating the recorded revenues go into “cost of sales”.  This would include the cost of raw materials, components, goods bought for resale and the direct labour costs of production.

Gross profit

The difference between revenue and cost of sales.  A simple but very useful measure of how much profit is generated from every £1 of revenue before overheads and other expenses are taken into account.  Is used to calculate the gross profit margin (%)

Distribution & administration expenses

Operating costs and expenses that are not directly related to producing the goods or services are recorded here.  These would include distribution costs (e.g. marketing, transport) and the wide range of administrative expenses or overheads that a business incurs.

Operating profit

A key measure of profit.  Operating profit records how much profit has been made in total from the trading activities of the business before any account is taken of how the business is financed.

Finance expenses

Interest paid on bank and other borrowings, less interest income received on cash balances, is shown here.  A useful figure for shareholders to assess how much profit is being used up by the funding structure of the business.

Profit before tax

Calculated as operating profit less finance expenses

Tax

An estimate of the amount of corporation tax that is likely to be payable on the recorded profit before tax

Profit attributable to shareholders

The amount of profit that is left after the tax has been accounted for.  The shareholders then decide how much of this is paid out to them in dividends and how much is left in the business (“retained earnings” in the equity section of the balance sheet)


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Starting a Business

Sources of Finance for a Startup
Franchising
Cash Flow Forecasting for a Startup
Creating & Protecting Business Ideas
Startups and Understanding the Market
Market Research for a Startup
Locating the Startup Business
Choosing a Legal Structure for a Startup
Employing People in a Startup
Generating and Protecting a Business Idea
Using Breakeven in Decision-Making

Finance

Revenues
Breakeven Basics
Costs, Revenues and Profits
Business Costs
Using Budgets
Using Breakeven in Decision-Making
Investment Appraisal Basics
Financial Strategies
Measuring and Improving Profit
Improving Cash Flow
Working Capital
Balance Sheet
Income Statement
Financial Efficiency Ratios
Profitability Ratios and ROCE
Liquidity Ratios
Gearing

Marketing

Competition
Products & Brands
Place (Distribution)
Promotion
Pricing
Price Elasticity of Demand

Business Organisation

Basics of Business Growth
Business Activities
Legal Structure Basics
Franchising
Sole Traders and Partnerships
Limited Companies
Generating and Protecting a Business Idea
Organisational Structures

People

Working in Teams
Communication Basics
Communication Methods
Workforce Planning
Recruitment, Selection & Training
Employee Motivation
Organisational Structures

Operations

Operational Objectives
Critical Path Analysis
Scale and Resource Mix
Lean Production
Capacity Management
Customer Service Basics
Managing Quality
Operational Decision-making
Using Technology in Operations
Working with Suppliers

Economic Environment

Economic Sectors
Government Spending & Taxation
Inflation
Unemployment
Interest Rates & Monetary Policy

Business Strategy

Leadership styles
Business Culture
Change Management







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INTRODUCTION TO ACCOUNTS
Introduction to Accounting
Users of Accounts
Accounting Concepts and Conventions
Stakeholder Theory
Characteristics of Accounting Information
Alternatives to Profit Maximisation
Maximising the Value of a Business
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BUDGETING
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SOURCES OF FINANCE
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Introduction to Raising Business Finance
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Overdraft Financing
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Sources of Equity Finance
Rights Issues
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Intoduction to Leasing
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