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An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statement of financial performance'', ''earnings statement'', ''statement of earnings'', ''operating statement'', or ''statement of operations'') is one of the
financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s of a company and shows the company's
revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
s and
expenseExpenditure is an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. For students or parent ...
s during a particular period. It indicates how the
revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
s (also known as the ''“top line”'') are transformed into the
net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busines ...
or net profit (the result after all revenues and expenses have been accounted for). The purpose of the income statement is to show
managers Management (or managing) is the administration of an organization An organization, or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -iz ...

managers
and
investor An investor is a person that allocates capital with the expectation of a future financial return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Types ...
s whether the company made money (profit) or lost money (loss) during the period being reported. An income statement represents a period of time (as does the
cash flow statement In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as b ...
). This contrasts with the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
, which represents a single moment in time.
Charitable organizations A charitable organization or charity is an organization whose primary objectives are philanthropy Philanthropy consists of "private initiatives, for the Public good (economics), public good, focusing on quality of life". Philanthropy contrasts ...
that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the ''statement of activities''. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended. The income statement can be prepared in one of two methods. The Single Step income statement totals revenues and subtracts expenses to find the bottom line. The Multi-Step income statement takes several steps to find the bottom line: starting with the
gross profit For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work ...
, then calculating
operating expenses An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure Capital expenditure or capital expense (cap ...
. Then when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.


Usefulness and limitations of income statement

Income statements may help investors and creditors determine the past financial performance of the enterprise, predict the future performance, and assess the capability of generating future cash flows using the report of income and expenses. However, information of an income statement has several limitations: * Items that might be relevant but cannot be reliably measured are not reported (''e.g.'', brand recognition and loyalty). * Some numbers depend on accounting methods used (''e.g.'', using FIFO or LIFO accounting to measure
inventory Inventory () or stock () refers to the goods and materials that a holds for the ultimate goal of resale, production or utilisation. is a discipline primarily about specifying the shape and placement of stocked goods. It is required at differen ...
level). * Some numbers depend on judgments and estimates (''e.g.'',
depreciation In accountancy Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been ...

depreciation
expense depends on estimated useful life and salvage value). - INCOME STATEMENT GREENHARBOR LLC - For the year ended DECEMBER 31 2010 € € Debit Credit Revenues GROSS REVENUES (including INTEREST income) 296,397 -------- Expenses: ADVERTISING 6,300 BANK & CREDIT CARD FEES 144 BOOKKEEPING 2,350 SUBCONTRACTORS 88,000 ENTERTAINMENT 5,550 INSURANCE 750 LEGAL & PROFESSIONAL SERVICES 1,575 LICENSES 632 PRINTING, POSTAGE & STATIONERY 320 RENT 13,000 MATERIALS 74,400 TELEPHONE 1,000 UTILITIES 1,494 -------- TOTAL EXPENSES (195,515) -------- NET INCOME 100,882 Guidelines for statements of comprehensive income and income statements of business entities are formulated by the
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent, accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
and numerous country-specific organizations, for example the
FASB The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles Publicly traded companies typically are subject to the most rigorous ...
in the U.S.. Names and usage of different accounts in the income statement depend on the type of organization, industry practices and the requirements of different jurisdictions. If applicable to the business, summary values for the following items should be included in the income statement:"Presentation of Financial Statements"
International Accounting Standards Board. Accessed 17 July 2010.


Operating section

*
Revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
- Cash inflows or other enhancements of assets (including
accounts receivable Accounts receivable, abbreviated as AR or A/R, are legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for. These are generally in the form of invoices An in ...
) of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations. It is usually presented as sales minus sales discounts, returns, and allowances. Every time a business sells a product or performs a service, it obtains revenue. This often is referred to as gross revenue or sales revenue. *
Expenses Expenditure is an outflow of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corner">174x174px Money is any item or ve ...
- Cash outflows or other using-up of assets or incurrence of liabilities (including
accounts payable Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. Overview An accounts ...
) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations. **
Cost of Goods Sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
(COGS) /
Cost of Sales Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
- represents the direct costs attributable to goods produced and sold by a business (manufacturing or merchandizing). It includes ''material costs'', ''direct labour'', and ''overhead costs'' (as in
absorption costing Total absorption costing (TAC) is a method of Accounting cost which entails the full cost of manufacturing or providing a service. TAC includes not just the costs of materials and labour, but also of all manufacturing overheads (whether ‘fixed ...
), and excludes operating costs (period costs) such as selling, administrative, advertising or R&D, etc. ** Selling, General and Administrative expenses (
SG&A SG&A (alternately SGA, SAG, G&A or SGNA) is an initialism used in accountancy, accounting to refer to Selling, General and Administrative Expenses, which is a major non-production cost presented in an income statement (statement of profit or loss ...
or SGA) - consist of the combined payroll costs. SGA is usually understood as a major portion of non-production related costs, in contrast to production costs such as direct labour. *** Selling expenses - represent expenses needed to sell products (e.g., ''salaries of sales people, commissions and travel expenses, advertising, freight, shipping, depreciation of sales store buildings and equipment'', etc.). *** General and Administrative (G&A) expenses - represent expenses to manage the business (''salaries of officers / executives, legal and professional fees, utilities, insurance, depreciation of office building and equipment, office rents, office supplies'', etc.). **
Depreciation In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in a ...

Depreciation
/
Amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academ ...
- the charge with respect to
fixed assets Fixed assets, also known as long-lived assets, tangible assets or property, plant and equipment (PP&E), is a term used in accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (scienc ...
/
intangible assets An intangible asset is an asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economi ...
that have been capitalised on the
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

balance sheet
for a specific (accounting) period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement. ** Research & Development (R&D) expenses - represent expenses included in research and development. ''Expenses'' recognised in the income statement should be analysed either by nature (raw materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function (cost of sales, selling, administrative, etc.). (IAS 1.99) If an entity categorises by function, then additional information on the nature of expenses, at least, – depreciation, amortisation and employee benefits expense – must be disclosed. (IAS 1.104) The major exclusive of costs of goods sold, are classified as operating expenses. These represent the resources expended, except for inventory purchases, in generating the revenue for the period. Expenses often are divided into two broad sub classicifications selling expenses and administrative expenses.


Non-operating section

* Other revenues or gains - revenues and gains from other than primary business activities (e.g., ''rent'', ''income from patents'', goodwill). It also includes unusual gains that are either unusual or infrequent, but not both (e.g., ''gain from sale of securities'' or ''gain from disposal of fixed assets'') * Other expenses or losses - expenses or losses not related to primary business operations, (e.g., ''foreign exchange loss''). * Finance costs - costs of borrowing from various creditors (e.g., ''
interest expense Interest expense relates to the cost In production, research Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization, and analysis of information to i ...
s'', ''bank charges''). * Income tax expense - sum of the amount of
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of
deferred tax Deferred tax is a notional asset or liability to reflect corporate income taxation on a basis that is the same or more similar to recognition of profits than the taxation treatment. Deferred tax liabilities can arise as a result of corporate tax ...
liabilities (or assets).


Irregular items

They are reported separately because this way users can better predict future cash flows - irregular items most likely will not recur. These are reported ''net of taxes''. * Discontinued operations is the most common type of irregular items. Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations. Discontinued operations ''must'' be shown separately. Cumulative effect of changes in accounting policies (principles) is the difference between the book value of the affected assets (or liabilities) under the old policy (principle) and what the book value would have been if the new principle had been applied in the prior periods. For example, valuation of inventories using LIFO instead of weighted average method. The changes should be applied retrospectively and shown as adjustments to the ''beginning'' balance of affected components in
Equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the differe ...
. All comparative financial statements should be restated. (IAS 8) However, ''changes in estimates'' (e.g., estimated useful life of a fixed asset) only requires prospective changes. (IAS 8) No items may be presented in the income statement as extraordinary items under IFRS regulations, but are permissible under US GAAP. (IAS 1.87) ''Extraordinary items'' are both unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation, prohibitions under new regulations. ote: natural disaster might not qualify depending on location (e.g., frost damage would not qualify in Canada but would in the tropics). Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)


Disclosures

Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material, including: (IAS 1.98) * Write-downs of
inventories Inventory (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English i ...
to net realisable value or of
property, plant and equipment Fixed assets, also known as long-lived assets, tangible assets or property, plant and equipment (PP&E), is a term used in accounting for assets and property that cannot easily be converted into cash. Fixed assets are different than current assets ...
to recoverable amount, as well as ''reversals'' of such write-downs * Restructurings of the activities of an entity and ''reversals'' of any provisions for the costs of restructuring * Disposals of items of property, plant and equipment * Disposals of investments * Discontinued operations * Litigation settlements * Other reversals of provisions


Earnings per share

Because of its importance,
earnings per share Earnings per share (EPS) is the monetary value of earningsEarnings are the net benefits of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single ...

earnings per share
(EPS) are required to be disclosed on the face of the income statement. A company which reports any of the irregular items must also report EPS for these items either in the statement or in the notes. \text = \frac There are two forms of EPS reported: * Basic: in this case “weighted average of shares outstanding” includes only actual stocks outstanding. * Diluted: in this case “weighted average of shares outstanding” is calculated as if all stock options, warrants, convertible bonds, and other securities that could be transformed into shares ''are'' transformed. This increases the number of shares and so EPS decreases. Diluted EPS is considered to be a more reliable way to measure EPS.


Sample income statement

The following income statement is a very brief example prepared in accordance with
IFRS International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus a ...
. It does not show all possible kinds of accounts, but it shows the most usual ones. Differences between
IFRS International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus a ...
and
US GAAP Generally Accepted Accounting Principles (GAAP or U.S. GAAP, pronounced like "gap") is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP ...
would affect the interpretation of the following sample income statements.


Bottom line

“Bottom line” is the
net income In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busines ...
that is calculated after subtracting the expenses from revenue. Since this forms the last line of the income statement, it is informally called “bottom line.” It is important to investors as it represents the profit for the year attributable to the shareholders. After revision to IAS 1 in 2003, the Standard is now using profit or loss for the year rather than ''net profit or loss'' or ''net income'' as the descriptive term for the bottom line of the income statement.


Requirements of IFRS

On 6 September 2007, the
International Accounting Standards Board The International Accounting Standards Board (IASB) is the independent, accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
issued a revised ''IAS 1: Presentation of Financial Statements'', which is effective for annual periods beginning on or after 1 January 2009. A business entity adopting IFRS must include: * a statement of comprehensive income or * ''two'' separate statements comprising: :# an income statement displaying components of profit or loss ''and'' :# a ''statement of comprehensive income'' that ''begins'' with profit or loss (bottom line of the income statement) and displays the items of other comprehensive income for the reporting period. (IAS1.81) All non-owner changes in equity (i.e., ''comprehensive income'') shall be presented either in the statement of comprehensive income or in a separate income statement and a statement of comprehensive income. Components of comprehensive income may not be presented in the
statement of changes in equity A statement of changes in equity and similarly the statement of changes in owner's equity for a , statement of changes in partners' equity for a , statement of changes in shareholders' equity for a or statement of changes in taxpayers' equity for ...
. ''
Comprehensive income In a companies' financial reporting, comprehensive Income (or comprehensive earnings) "includes all changes in equity during a period except those resulting from investments by owners and distributions to owners". Because that use excludes the effe ...
'' for a period includes profit or loss (net income) for that period and other comprehensive income recognised in that period. All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. (IAS 1.88) Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. (IAS 1.89)


Items and disclosures

The statement of comprehensive income should include: (IAS 1.82) #
Revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
# Finance costs (including
interest expense Interest expense relates to the cost In production, research Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization, and analysis of information to i ...
s) # Share of the profit or loss of associates and
joint ventures A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownershipEquity sharing is another name for shared ownership or ''co-ownership (disambiguation), co-ownership''. It takes one property, m ...
accounted for using the
equity method Equity method in accounting is the process of treating investments in associate companies. Equity accounting is usually applied where an investor entity holds 20–50% of the voting stock of the associate company, and therefore has significant infl ...
#
Tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
expense # A ''single'' amount comprising the total of (1) the ''post-tax'' profit or loss of '' discontinued operations'' and (2) the ''post-tax'' gain or loss recognised on the disposal of the assets or disposal group(s) constituting the ''discontinued operation'' # Profit or loss # Each component of other comprehensive income classified by nature # Share of the other comprehensive income of associates and joint ventures accounted for using the equity method #
Total comprehensive income In a companies' financial reporting, comprehensive Income (or comprehensive earnings) "includes all changes in equity during a period except those resulting from investments by owners and distributions to owners". Because that use excludes the effe ...
The following items must also be disclosed in the statement of comprehensive income as allocations for the period: (IAS 1.83) * Profit or loss for the period attributable to
non-controlling interest In accounting, minority interest (or non-controlling interest) is the portion of a subsidiary corporation's stock that is not owned by the parent corporation. The magnitude of the minority interest in the subsidiary company is generally less than 50 ...
s and owners of the
parent A parent is a caregiver of the offspring In biology, offspring are the young creation of living organisms, produced either by a Asexual reproduction, single organism or, in the case of sexual reproduction, two organisms. Collective offspring ...
* Total comprehensive income attributable to non-controlling interests and owners of the parent ''No'' items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as ''extraordinary items''.


See also

*
Comprehensive income In a companies' financial reporting, comprehensive Income (or comprehensive earnings) "includes all changes in equity during a period except those resulting from investments by owners and distributions to owners". Because that use excludes the effe ...
*
Cash flow A cash flow is a real or virtual movement of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in ...
*
Trading statement The trading statement is an expanded version of sales portion of the Income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss ...
* Profit model *
Statement of changes in equity A statement of changes in equity and similarly the statement of changes in owner's equity for a , statement of changes in partners' equity for a , statement of changes in shareholders' equity for a or statement of changes in taxpayers' equity for ...
* Model audit *
International Financial Reporting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus ...
(and their
requirements In product development In business Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise e ...
) * PnL Explained - Profit and loss explained report


References

* Harry I. Wolk, James L. Dodd, Michael G. Tearney. ''Accounting Theory: Conceptual Issues in a Political and Economic Environment'' (2004). . * Angelico A. Groppelli, Ehsan Nikbakht. ''Finance'' (2000). . * Barry J. Epstein, Eva K. Jermakowicz. ''Interpretation and Application of International Financial Reporting Standards'' (2007). . * Jan R. Williams, Susan F. Haka, Mark S. Bettner, Joseph V. Carcello. ''Financial & Managerial Accounting'' (2008). . {{DEFAULTSORT:Income Statement Accounting terminology