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An Income Statement Example

Previous lesson: Accounting Reports
Next lesson: Statement of Owners Equity

The income statement is the first component of our financial statements. It is also known as the profit and loss statement.

The income statement is a report showing the profit or loss for a business during a certain period, as well as the incomes and expenses that resulted in this overall profit or loss. The amount of the profit or loss for a business during a certain period indicates the financial performance of the business.

An income statement usually covers a year; however this statement may be drawn up for shorter periods, such as one month, three months (quarters) or six months. The period of time that is covered by the income statement (and other financial statements) is called the accounting period.

A regular 12-month accounting period does not necessarily have to begin on the first day of the year and end on the last. Accounting periods can, for example, run from March 1st to February 28th, or July 1st to June 31st, etc. The choice of the accounting period rests with the enterprise itself.

The format of an income statement for a service business (such as a medical, accounting or legal practice, or services such as plumbing, cleaning, consulting, design, etc.) is shown below. We will go over the format of an income statement for a trading business (a business that buys and sells goods) and for a manufacturing business (a business that makes goods themselves) separately in future sections.

Note that a common expense is "interest paid" (or "bank charges"). Interest is often payable on loans taken from the bank (or taken from other sources). A loan of $10,000 may have an interest rate of 10%. This means that if you haven’t paid the loan back in a year, you would owe $1,000 more ($10,000 x 10%). This $1,000 would be reflected in the income statement as the "interest paid" expense.

Trial Balance Example

Here is our previous trial balance for George’s Catering. We will now take the income and expense items and create an income statement:

Income Statement Example

Budgeted income statements can also be drawn up, showing targeted figures for sales, expenses and profits. These budgeted figures can then be compared to the actual figures and action can be taken to rectify any shortfalls.

In the income statement above, we can see that the actual profit for the period is about $8,500 less than what was planned for. This was due to the income being $5,400 less ($100,000 – $94,600), and the expenses (such as water and electricity) being greater than expected.

These budgeted figures would normally be drawn up based on actual figures from past years, but taking into account any expected future changes. The budgeted figures (and the way these figures were obtained) would be explained or justified in additional notes to the income statement.

Previous lesson: Accounting Reports
Next lesson: Statement of Owners Equity

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