Income statements
Cards (9)
- Accounts are the financial records of a firm’s transactions.
- Accountants are the professionally qualified people who have responsibility for keeping accurate accounts and for producing the final accounts.
- Final accounts are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business.
- Profit = Revenue – Cost of making products or providing servicesThe profit formula also suggests that this surplus can be increased by:
- Increasing revenue by more than costs
- Reducing the cost of making products.
- A combination of 1 and 2.
- Why profit is important to private sector businesses:
- An income statement is a financial statement that records the income of a business and all costs incurred to earn that income over a period of time (for example, one year). It is also known as a profit and loss account.The revenue is the income to a business during a period of time from the sale of goods or services.
- The cost of sales is the cost of producing or buying in the goods actually sold by the business during a time period.A gross profit is made when revenue is greater than the cost of sales.Gross profit = Revenue – Cost of sales
- A trading account shows how the gross profit of a business is calculated.
- Net profit is the profit made by a business after all costs have been deducted from revenue. It is calculated by subtracting overhead costs from gross profits.Depreciation is the fall in the value of a fixed asset over time.
- Retained profit is the net profit reinvested back into a company, after deducting tax and payments to owners, such as dividends.
- An income statement includes:
- Gross profit = revenue - cost of sales
- Net profit = gross profit - expenses/overheads
- Retained profit = net profit - tax and dividends
An income statement:- Shows profit/loss not cash flow
- Used by managers to compare business performance
- Important part of a company’s published accounts