income statement

• what is an income statement?

  an accounting statement showing a businesses sales revenue, costs, and profits over a trading period
• what are the main components of an income statement?

  • revenue (turnover): income from sales of goods/services
  • cost of sales: direct costs of producing goods/ services
  • gross profit: revenue minus cost of sales
  • expenses (overheads): indirect costs not tied to production
  • net profit: gross profit minus expenses
• what is revenue?


  revenue, also called turnover, is the income earned from selling goods or services
• how is cost of sales calculated?

  cost of sales = opening inventory + purchases - closing inventory
• how is gross profit calculated?

  gross profit = revenue - cost of sales
• what does gross profit indicate?

  shows the profit made before deducting expenses
• what are expenses?


  overheads, including salaries, rent, marketing, utilities, and maintenance costs, which are not directly linked to production
• how is net profit calculated?

  net profit = gross profit - expenses
• what does net profit indicate?

  it shows the final profit after all expenses are deducted
• what steps are involved in creating an income statement?

  1. record sales revenue
  2. calculate cost of sales
  3. subtract cost of sales from revenue to get gross profit
  4. subtract total expenses from gross profit to get net profit
• how can a business improve its gross and net profit?

  • increase revenue: through advertising, price adjustments, or promotions
  • reduce costs: use cheaper materials, buy in bulk, automate processes, or reduce wages
• what are potential drawbacks of increasing revenue by raising prices?

  higher prices might reduce demand
• what are the risks of cutting costs by using cheaper materials?

  lower quality could lead to fewer sales