Income Statement/(Profit or Loss Ac)

Meaning of Income Statement

The income statement is a company’s one of the most important financial statement
that indicates profit and loss for an accounting year. This profit or loss is evaluated
by adding all revenues and then subtracting the expenses from operating and non-
operating activities.

Corporate finance and accounting use the income statement as one of the
significant financial statements. This income statement includes gross profit,
revenue, costs, taxes paid, net profit, selling and administrative expenses, other
expenses, and income, etc.

This income statement is used as a great base to start a financial report because
most of the information is available in this statement.

Components of an Income Statement

Most of the companies have similar components; however, due to the company’s
expense, income and operation type of operations, there are few variations.

The most basic income statement components are:

 Revenue/Sales – At the top of the statement, every firm’s sales and service revenue are
shown.
 Cost of Goods Sold (COGS) – It is a line-item that sums up the direct costs related to
goods sold to make revenue. If the company is a service business, COGS is also known
as the cost of sales.

 Gross Profit – It is determined by subtracting the cost of goods sold from sales revenue.

 Marketing, Promotion, and Advertising Expenses – Most organizations have

expenses associated with selling products and services. Marketing, promotion, and
advertising are often classified in the same cost.

 Depreciation & Amortization Expense – These are non-cash charges. A few examples
are depreciation charged on plant, property, and equipment (PP&E).

 Interest – It is divided into interest income and interest expense line in the income
statement.
 Income Statement Format
Company ABC’s Annual Income Statement

Revenue xxx
xxx
Operating Expenses
xxx
Salaries
xxx
Rent
xxx
Amortization
xxx
Depreciation
Operating Income xxx
Interest Expense xxx
Tax xxx
Net Income xxx

Income Statement Formula

Income Statement Example

Here is an income statement from Amit’s adjusted trial balance for the year-end
December 2015.

Amit Keyboard Shop’s Annual Income Statement For the Year-End December 2015

Revenue

Merchandise Sale 20,000

5,000
Music Lesson Income
Total Revenue 25,000
Expenses
Cost of Goods Sold 5,000
Depreciation Expense 2,000

Wage Expense 500

Rent Expense 400

Interest Expense 400

Supplies Expense 400

Utility Expense 300

Total Expense 9,000
Net Income 16,000

Balance Sheet
A balance sheet is a financial statement that contains details of a company’s
assets or liabilities at a specific point in time. It is one of the three core
financial statements (income statement and cash flow statement being the
other two) used for evaluating the performance of a business.

A balance sheet serves as reference documents for investors and other

stakeholders to get an idea of the financial health of an organization. It enables
them to compare current assets and liabilities to determine the business’s
liquidity, or calculate the rate at which the company generates returns.
Comparing two or more balance sheets from different points in time can also
show how a business has grown.

With this information, stakeholders can also understand the company’s

prospects. For instance, the balance sheet can be used as proof of
creditworthiness when the company is applying for loans. By seeing whether
current assets are greater than current liabilities, creditors can see whether
the company can fulfill its short-term obligations and how much financial risk
it is taking.

Features of Balance Sheet:

The features of a balance sheet are as follows:

 It is regarded as the last step in final accounts creation

 It is a statement and not an account
 It consists of transactions recorded under two sides namely, assets and liabilities. Assets are
placed in the left hand side, while the liabilities are placed on the right hand side
 The total of both side should always be equal
  The balance sheet discloses financial position of the business
 It is prepared after trading and profit and loss account is prepared.

Importance of Balance Sheet:

Balance sheet analysis can say many things about a company’s achievement. Few essential
factors of the balance sheet are listed below:

 Creditors, investors, and other stakeholders use this financial tool to know the financial status of
a business.
 It is used to analyse a company’s growth by comparing different years.
 While applying for a business loan, a company has to submit a balance sheet to the bank.
 Stakeholders can find out the business accomplishment and liquidity position of a company.
 Company’s balance sheet analysis can detect business expansion and future expenses.

What is the purpose of balance sheet?

The main purpose of the balance sheet is to show a company’s financial status. This sheet
shows a company’s assets and liabilities, along with the money invested in the business. This
statement is required to analyze the financial status information for several consecutive
periods.
Generally, investors and creditors look at the balance sheet of the company to understand
how effectively a company will use its resources and how much it can give in return. Though
the balance sheet can be prepared at any time, it is mostly prepared at the end of the
accounting period. The balance sheet can be created at any time. However, it is often
prepared at the end of the financial year.

Balance sheet example with sample format

A balance sheet depicts many accounts, categorized under assets and liabilities.
Like any other financial statement, a balance sheet will have minor variations in
structure depending on the organization. Following is a sample balance sheet,
which shows all the basic accounts classified under assets and liabilities so that
both sides of the sheet are equal.
classified under assets and liabilities so that both sides of the sheet are equal.
 Assets
An asset is something that the company owns and that is beneficial for the
growth of the business. Assets can be classified based on convertibility,
physical existence, and usage.

a. Convertibility: This describes whether the asset can be easily converted to

cash. Based on convertibility, assets are further classified into current assets
and fixed assets.

1. Current assets: Assets which can be easily converted into cash or cash
equivalents within a duration of one year. Examples include short-term
deposits, marketable securities, and stock.

2. Fixed assets: Assets which cannot be easily or readily converted to cash. For
example, buildings, machinery, equipment, or trademarks.
b. Physical existence: Assets can be of two types, tangible and intangible.
1. Tangible assets: Assets which you can see and feel, like office supplies,
machinery, equipment, and buildings.

2. Intangible assets: Assets which do not have physical existence, like patents,
brands, and copyrights.

c. Usage: Assets can be classified as operating and non-operating assets.

1. Operating assets: Assets which are necessary to conduct business operations. For
example, buildings, machinery, and equipment.

2. Non-operating assets: Short-term investments or marketable securities that are not

necessary for daily operations.
Liabilities

Liabilities are what the company owes to other parties. This includes debts and
other financial obligations that arise as an outcome of business transactions.
Companies settle their liabilities by paying them back in cash or providing an
equivalent service to the other party. Liabilities are listed on the right side of the
balance sheet.

Depending on context, liabilities can be classified as current and non-current.

1. Current liabilities: These include debts or obligations that have to be fulfilled

within a year. Current liabilities are also called short-term assets, and they include
accounts payable, interest payable, and short-term loans.

2. Non-current liabilities: These are debts or obligations for which the due date is
more than a year. Non-current liabilities, also called long-term liabilities, include
bonds payable, long-term notes payable, and deferred tax liabilities.

Owner’s Equity/ Earnings

Owner’s equity is equal to total assets minus total liabilities. In other words, it is
the amount that can be handed over to shareholders after the debts have been paid
and the assets have been liquidated. Equity is one of the most common ways to
represent the net value of the company. Part of shareholder’s equity is retained
earnings, which is a fixed percentage of the shareholder’s equity that has to be paid
as dividends.

The equity value can be positive or negative. If the shareholder’s equity is positive,
then the company has enough assets to pay off its liabilities. If it is negative, then
liabilities exceed assets.
Balance sheet formula & equation
The balance sheet equation follows the accounting equation, where assets are on
one side, liabilities and shareholder’s equity are on the other side, and both sides
balance out.

Assets = Liabilities + Shareholder’s Equity

According to the equation, a company pays for what it owns (assets) by borrowing
money as a service (liabilities) or taking from the shareholders or investors
(equity).

How to prepare a Balance Sheet?

Below are the steps mentioned to prepare a balance sheet.

1. Compose a trial balance- It is a regular report included in any accounting programme. If

it is a manual mode, then create a trial balance by transferring every general ledger
account’s ending balance to a spreadsheet.
2. Arrange the trial balance- It is important to arrange the initial trial balance to assure that
the balance sheet similar to the relevant accounting structure. While using adjusting
entries to adjust the trial balance all the entry should be completely recorded so the
auditors can understand why it was made.
3. Discard all expense and revenue accounts- The trial balance includes
expenses, revenue, losses, gains, liabilities, equity, and assets. Delete all from the trial
balance except equity, liabilities, and assets. However, the deleted accounts are used to
create an income statement.
4. Calculate the remaining accounts- In this stage, sum up all the trial balance account
used to create a balance sheet. The typical line items used in the balance sheet are:
 Cash
 Accounts receivable
 Inventory
 Fixed assets
 Other assets
 Accounts payable
 Accrued liabilities
 Debt
 Other liabilities
 Common stock
 Retained earnings
5. Validate the balance sheet- The total for all assets recorded in the balance sheet
should be similar to the liabilities and stockholders’ equity accounts.
6. Present in the required balance sheet format.