Chapter 5 - Income statement - Accounting Tuition

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

Discount received

Interest received

Rent received

Commission received

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 31^st 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 31^st 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 31^st 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 31^st 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 31^st 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 31^st 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 31^st 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 31^st 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 31^st 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