Chapter 5 - Income statement


An income statement is prepared to show the Gross Profit/Loss and Net Profit/Loss of the business. There are 2 sections in an income statement:

Trading Section – This section is prepared to show Gross profit or Gross loss of a business. 

Cost of sales = Opening inventory + Net purchases – closing inventory 

Gross profit = Sales – Cost of Sales 

If cost of sales is less than turnover then the business made a Gross Profit.

If cost of sales is greater than turnover then the business made a Gross Loss.

Profit and Loss Section – This section is prepared to show profit or loss of a business 

Profit / Loss for the year = Gross profit + other income – Expenses

If Gross profit is greater than total expenses then the business made a profit during the financial year. 

If gross profit is less than total expenses then the business made a loss for the year. 

Items used to prepare Trading section

Sales (Revenue)

Return inwards (Sales return)

Opening and closing inventory

Purchases

Carriage inwards (on purchases)

Return outwards (Purchases return)

Air freight charges / Customs duty

Items used to prepare Profit and Loss section

  • Other Income

Discount received

Interest received

Rent received

Commission received

  • Expenses - Examples :-

Wages and salaries

Insurance

Communication expenses

Rent and rates

Advertising

Selling expenses

Power, light and heat / electricity

Warehouse wages

Marketing expenses

Discount allowed

Commission on sales

Commission paid

Administrative expenses

Office expenses

Interest received

Distribution cost

Postage and Stationery

Motor van running expenses

Carriage outwards (on sales)

Motor van expenses

General /sundry expenses


Format of preparing an Income statement

Income statement for the year ended 31st December 2016


$

$

$

Sales / Revenue



****

Less sales return ( return inwards )



(**)

Net sales / Net revenue



****

Less cost of sales:




Opening inventory


****


Purchases / ordinary goods purchased

****



Add Carriage on purchases ( Carriage inwards )

**



Less Purchases return ( return outwards )

(**)

***


Goods available for sales


****


Less Closing inventory


(****)


Cost of sales



(****)

Gross Profit



****

Add other income:




Discount received



**

Rent received



**

Interest received



**

Commission received



**

Gross income



****

Less expenses:




Wages and salaries


***


Rent and rates / insurance / advertising


***


General / administrative / sundry expenses


***


Discount allowed


***


Carriage on sales ( Carriage outwards )


***


Commission Payable


***


Interest Payable


***


Total expenses



(***)

Profit for the year



****



Worked Example

$

Sales(Revenue)

132 500

Purchases

67 000

Return inwards(sales return)

1 500

Return outwards(purchases return)

300

Carriage inwards(on purchases)

250

Carriage outwards(on sales)

350

Discount allowed

1 200

Discount received

1 400

Rent received

1 100

Wages and salaries

3 000

Rent and rates

3 200

Advertising

1 450

Inventory - 1st Jan

15 340

Inventory - 31st Dec

14 440

Stationery

150

Motor van expenses

300

Electricity

200

Insurance

140


Answer Worked Example

Income statement for the year ended 31st December 2000




 

 


Trading Account Section


$

$

$

 

 

Sales(revenue)



132 500

 

 

Less return inwards(sales return)



(1 500)

 

 




131000

 

 

Less cost of sales




 

 

Opening inventory


15 340


 

 

Purchases

67 000



 

 

Add carriage inwards(on purchases)

250



 

 

Less Return outwards(Purchases return)

(300)



 

 

Add freight charges

0



 

 

Add customs duty

0

66 950


67000+250-300

Goods available for sales


82 290


15340+66950

Less closing inventory


(14 440)


 

 

Cost of sales



(67 850)

82290-14440

Gross Profit



63 150

131000-67850

Add other income




 

 


Profit and Loss account section

Discount received



1 400

 

 

Rent received



1 100

 

 




65 650

63150+1400+1100

Less expenses




 

 

Carriage outwards(on sales)


350


 

 

Discount allowed


1 200


 

 

Wages and salaries


3 000


 

 

Rent and rates


3 200


 

 

Advertising


1 450


 

 

Stationery


150


 

 

Motor van expenses


300


 

 

Electricity


200


 

 

Insurance


140

(9 990)

 

 

Profit for the year



55 660

65650-9990

 


Q1 – Prepare an Income statement for the year ended 31st December 2000


$

Sales (Revenue)

139 500

Purchases

69 000

Return inwards (sales return)

2 500

Return outwards (purchases return)

1 300

Carriage inwards (on purchases)

1 250

Carriage outwards (on sales)

1 350

Discount allowed

1 200

Discount received

1 100

Rent received

1 350

Wages and salaries

3 250

Rent and rates

3 150

Advertising

1 550

Inventory - 1st Jan

15 250

Inventory - 31st Dec

14 450

Stationery

950

Motor van expenses

550

Electricity

250

Insurance

750

 

Q2 – Prepare an Income statement for the year ended 31st December 2001


$

Sales (Revenue)

148 000

Purchases

99000

Return inwards (sales return)

600

Return outwards (purchases return)

500

Carriage inwards (on purchases)

300

Carriage outwards (on sales)

400

Discount allowed

1500

Discount received

1600

Interest received

1200

Warehouse wages

4200

Rent and rates

3300

Insurance

1600

Inventory - 1st Jan

11 200

Inventory - 31st Dec

13 450

Sundry expenses

150

Distribution cost

130

Administrative expenses

170

 

Q3 – Prepare an Income statement for the year ended 31st December 2002


$

Inventory - 1st Jan

3 750

Inventory - 31st Dec

4 500

Return outwards (purchases return)

1 200

Carriage inwards (on purchases)

350

Discount allowed

1 100

Discount received

2 300

Rent received

1 100

Wages and salaries

1 800

Sales (Revenue)

49 000

Purchases

12 000

Return inwards (sales return)

550

Rent and rates

240

Advertising

360

Carriage outwards (on sales)

320

Customs duty

200

Air freight charges

150

Office expenses

120

General expenses

180

 

 

Q4 – Prepare an Income statement for the year ended 31st December 2003


$

Return inwards (sales return)

400

Return outwards (purchases return)

440

Carriage inwards (on purchases)

330

Inventory - 1st Jan

1 990

Inventory - 31st Dec

2 110

Discount received

3 120

Commission received

4 345

Commission Paid

3 255

Interest on loan

125

Carriage outwards (on sales)

230

Discount allowed

440

Sales (Revenue)

32 300

Purchases

13 400

Light and Heat

990

Marketing expenses

110

Communication expenses

140

Selling expenses

250

 

Q5. Prepare an income statement for the year ended 31st December 2004


$

Sales(Revenue)

130 500

Purchases

67 000

Return inwards(sales return)

1 300

Return outwards(purchases return)

3 000

Carriage inwards(on purchases)

350

Carriage outwards(on sales)

400

Discount allowed

1 100

Discount received

1 500

Rent received

1 600

Wages and salaries

3 200

Rent and rates

3 400

Advertising

1 550

Inventory - 1st Jan

15 300

Inventory - 31st Dec

14 400

Stationery

350

Motor van expenses

200

Electricity

700

Insurance

400


Q6. Prepare an income statement for the year ended 31st December 2005


$

Sales(Revenue)

128 900

Purchases

99 800

Return inwards(sales return)

500

Return outwards(purchases return)

400

Carriage inwards(on purchases)

200

Carriage outwards(on sales)

490

Discount allowed

1580

Discount received

1670

Interest received

1225

Warehouse wages

4255

Rent and rates

3365

Insurance

1685

Inventory - 1st Jan

11 215

Inventory - 31st Dec

13 465

Sundry expenses

190

Distribution cost

180

Administrative expenses

110


Q7. Prepare an income statement for the year ended 31st December 2006


$

Inventory - 1st Jan

3 650

Inventory - 31st Dec

4 550

Return outwards(purchases return)

1 240

Carriage inwards(on purchases)

390

Discount allowed

1 110

Discount received

2 380

Rent received

1 170

Wages and salaries

1 880

Sales(Revenue)

49 900

Purchases

12 200

Return inwards(sales return)

650

Rent and rates

440

Advertising

660

Carriage outwards(on sales)

420

Customs duty

200

Air freight charges

350

Office expenses

520

General expenses

380


Q8. Prepare an income statement for the year ended 31st December 2007


$

Return inwards(sales return)

600

Return outwards(purchases return)

540

Carriage inwards(on purchases)

430

Inventory - 1st Jan

1 290

Inventory - 31st Dec

2 160

Discount received

2 120

Commission received

3 355

Commission Paid

2 255

Interest on loan

225

Carriage outwards(on sales)

130

Discount allowed

640

Sales(Revenue)

52 300

Purchases

23 400

Light and Heat

1 090

Marketing expenses

510

Communication expenses

240

Selling expenses

350