After we have crated the trial balance. We are now able to produce an income statement
What is an income statement?
The aim of the income statement is to show how much profit has been generated by the business in a financial year.
There are 3 key sections of an income statement:
- Gross profit
- Additional Income
- Minus Expenses
To calculate the Gross Profit there are a set of sets:
- First record the revenue (or sales)
- Then minus any returns inwards(or sales returns)
This will then tell you how much revenue the business has made. Next we need to calculate the cost of sale. To work out the cost of sales:
- First add the value of the inventory at the beginning of the year (opening inventory)
- Then add any purchases made in the year
- Minus any purchases that were returned (purchase returns)
- Add any delivery costs (carriage inwards)
- Minus any inventory at the end of the year (closing inventory)
- The total sum is known as the cost of sales.
From the revenue we can minus the cost of sales to get the gross profit value
The next section is the additional income section this section will reflect any income that is generated not from the sale of the product.
Examples of items that may go into the income received section include:
- Rent received
- Commission received
- Discounts received
- Decrease in provision of doubtful debts
After we have gained a total income value we can add this to the gross profit
The next section is the minus expenses section. Here we will list any expenses that are not to do with the sale of the product.
Examples of items that may go into this section include:
- Rent paid
- Discounts allowed
- Sundries/General expenses
- Decrease in provision for doubtful debts
- Provision for depreciation on non-current assets
After we have calculated the expenses section, we can minus this figure to attain a profit for the year. This figure will be used in the statement of financial position.