These are the summarized statements of accounting data by an enterprise through which it communicates accounting information to the external users. There are mainly 3 types of accounting statements i.e. Income statement, balance sheet and cash flow statement.
In this study we will examine the purpose of preparing income statement along with a brief description of principle elements of income statement.
Income statement also popularly known as profit and loss account measures the financial performance of a company during a specific accounting period. The statement basically summarize about the revenues and expenses on the various business activities whether operating or non-operating. If the expenses are greater than the revenues the income statement will show gross loss, on the other hand if revenue exceeds income it will show gross profit. Its purpose includes:
- Decision makers use to examine the company’s performance and take decisions.
- Investors can use to determine that whether the company can give good returns.
- Creditors use this to make decision regarding loans.
PRINCIPLE ELEMENTS OF INCOME STATEMENT:
- Sales: Amount generated by business in the form of revenue.
- Cost of goods sold: Expenses that are used directly or indirectly on the manufacturing process.
- Gross profit: It is excess of sales over the cost of goods sold.
- Operating expenses: These are the expenses incurred on various business operations like marketing, selling or administrative expenses. For example: office rent, salary, depreciation etc.
- Net income (loss) before taxes: It is the income earned prior of taxes and generally arrived when the operating expenses are deducted from GP.
- Taxes: Amount that you owe to government whether state or central.
- Net income (loss): This is the final amount that a business earns after paying due taxes.