Accounting 101 – Income Statement

Financial Reporting and Analysis of Profit and Loss

Oct 4, 2009 James Clausen

The income statement is an important part of the financial statement. The income statement is an important tool that shows the profitability of a business at month's end.

The income statement, also known as the profit and loss statement (P & L), allows a business to stop in time and take a snapshot of the company's profitability. The income statement is usually completed within a few days after month's end to show the profit or loss for the previous month. Besides showing previous months figures, the P & L report usually displays a running total of year-to-date figures.

From the General Ledger to the Income Statement

The income statement is an accumulation of the general ledger (GL) accounts that affect profitability. The general ledger accounts that affect profitability are generally revenue and expense accounts. The top portion of the P & L statement usually shows the general ledger revenue accounts and the bottom section shows the general ledger expense accounts balances at months end.

Gross Profit and the Income Statement

In order to figure net profit or loss, the financial statement must use gross profit in the top portion of the statement. Gross profit is figured by subtracting the GL account for cost of sales (or cost of goods sold) from the GL sales account. The upper portion of the P & L statement will normally show sales, along with gross profit as well as the gross profit percentage to sales.

The only actual amount that used to figure profit and loss is the gross profit. For example, let's use total sales at month end of $100,000 and cost of sale of $60,000.

Gross Profit Example

• $100,000 sales
• $60,000 cost of sales (- minus)
• $40,000 in gross profit (= equals)
• Gross profit as a percent of sales equals 40% ($40,000 / $100,00)

Creating the Income Statement

In real simple terms, net profit or loss is gross profit less expense. Besides gross profit there can also be many other types of income that can be used such as inventory adjustments or discounts. Expenses can also be separated into variable and fixed expenses. As a simplistic example let's use an auto parts store.

ABC Auto Parts Income Statement for January 2010

• Counter Retail GP $9,000
• Wholesale GP $15,000
• Accessories GP $5,000
• Purchase Discounts $1,000
• Total Gross Profit $30,000

• Payroll $11,000
• Rent $2,000
• Advertising $2,000
• Insurance $1,000
• Vehicle Maintenance $1,000
• Utilities $1,000
• Inventory Control $2,000
• Total Expense $20,000

The income statement is an important analytical tool to measure profitability. It can also be used to indicate positive and negative trends in expenses as well as sales and gross profits by comparing previous months' statements. The income statement is also used as a means for paying income taxes.

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The copyright of the article Accounting 101 – Income Statement in Accounting is owned by James Clausen. Permission to republish Accounting 101 – Income Statement in print or online must be granted by the author in writing.

Accounting 101 - Income Statement

Financial Statements Profit and Loss

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