Definition of the income statement: A financial report which presents a company’s income and expenses for a financial period, in a prescribed format.
What is the income statement?
An income statement is prepared by using the figures output by the general ledger for the relevant financial period.
Here is a general guide to the ‘flow’ of the income statement:
- It begins by presenting a company’s income and then deducts the cost of golds sold to reach gross profit.
- Then it deducts overheads to reach an operating profit.
- Next, it deducts finance and interest costs to show a profit before tax.
- Finally, after tax is deducted, the income statement shows a profit after tax.
The best financial accounting books will include several alternative formats of income statements used in different businesses.
Generally accepted accounting principles are used to ensure that an income statement looks consistent to other companies in the same jurisdiction, and that the amounts are prepared on a ‘like for like’ basis. The exact accounting standards and company law being applied will determine everything from the format, title and captions shown on the income statement.
A company may contrast the income statement with comparative figures, such as the prior period, and the budget figures. This helps to give context as to whether the income statement shows an improved performance.
How is the phrase income statement used in a sentence?
“The income statement presented by the holding company was blank as it trade not trade in the period.”
“The income statement shows a large depreciation charge since the capital expenditure programme from last year is now feeding through into depreciation.”
What else you should know about income statement
The income statement also goes by several other names:
- The profit & loss account
- The statement of total comprehensive income
- The statement of comprehensive income + the statement of other comprehensive income
Which title is used will depend on the accounting standards which the company has adopted, and in some cases, discretion.
Appendix: UK Companies Act Income Statement Formats
Here is an example of a real income statement format, as prescribed by the UK Companies Act ‘Schedule 1’.
This is format 1 of 4 available formats for UK accounts to use if applying the Companies Act requirements.
Line items in bold are subtotals.
- Cost of sales
- Gross profit or loss
- Distribution costs
- Administrative expenses
- Other operating income
- Income from shares in group undertakings
- Income from participating interests
- Income from other fixed asset investments
- Other interest receivable and similar income
- Amounts written off investments
- Interest payable and similar charges
- Profit or loss on ordinary activities before taxation
- Tax on profit or loss on ordinary activities
- Profit or loss on ordinary activities after taxation
- Extraordinary income
- Extraordinary charges
- Extraordinary profit or loss
- Tax on extraordinary profit or loss
- Other taxes not shown under the above items
- Profit or loss for the financial year