Back to: Financial Accounting
Hello again, everyone!
In Week 4, we’re going to focus on the Income Statement (also called the Profit and Loss Statement).
This is one of the key financial reports for any business, and understanding how to prepare and analyse it is essential for anyone pursuing accounting.
What is an Income Statement?
The Income Statement summarises a company’s revenues and expenses over a specific period (usually a month, quarter, or year). Its primary purpose is to show whether a company is profitable or not.
The basic structure looks like this:
Revenue – Expenses = Profit (or Loss)
Key Components of the Income Statement
Here are the main sections you’ll find in an Income Statement:
Revenue (Sales)
This is the income earned from the primary activities of the business, such as selling products or services. You’ll also see “Net Revenue,” which accounts for any discounts, returns, or allowances.
Cost of Goods Sold (COGS)
These are the direct costs of producing the goods or services that a business sells. For a retail company, this would include the cost of inventory sold during the period.
Gross Profit
This is the difference between Revenue and COGS. It’s a key indicator of a company’s efficiency in producing and selling its products.
Gross Profit = Revenue – COGS
Operating Expenses
These are the costs required to run the business, excluding COGS. Operating expenses include things like rent, salaries, utilities, and advertising. They can be broken down into:
Selling expenses
General and administrative expenses
Operating Income
This is the result after deducting operating expenses from gross profit. It shows how well the business performs from its core operations.
Operating Income = Gross Profit – Operating Expenses
Other Income/Expenses
This includes non-operating items, like interest or gains/losses from selling assets.
Net Income (or Loss)
This is the final profit or loss after accounting for all revenues, expenses, and taxes. This figure shows the company’s overall profitability.
Net Income = Operating Income + Other Income/Expenses – Taxes
The Importance of the Income Statement
The Income Statement is a crucial tool for both internal and external stakeholders:
Internal users (like managers and employees) use it to assess performance and plan future actions.
External users (such as investors, creditors, and analysts) rely on it to evaluate profitability and determine whether to invest in or lend to the business.
Example: Simple Income Statement
Here’s a quick example to illustrate:
XYZ Ltd – Income Statement for the Year Ending 31 December
Description
Amount (N)
Revenue
150,000
Cost of Goods Sold (COGS)
(80,000)
Gross Profit
70,000
Operating Expenses
(40,000)
Operating Income
30,000
Other Income
5,000
Net Income
35,000
In this example, XYZ Ltd made N150,000 in revenue, and after deducting COGS and operating expenses, they made a net profit of N35,000.