Income Statement - Introduction | tutor2u Business
Study notes

Income Statement - Introduction

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

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 of an Income Statement

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)

Subscribe to email updates from tutor2u Business

Join 1000s of fellow Business teachers and students all getting the tutor2u Business team's latest resources and support delivered fresh in their inbox every morning.

You can also follow @tutor2uBusiness on Twitter, subscribe to our YouTube channel, or join our popular Facebook Groups.

Teaching Vacancies

Recruitment

Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u

A New Home for tutor2u Resources

We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores.

For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your mytutor2u account.