Finance

An Introduction to Income Statements

Income statement is a type of financial statements used in accountancy and businesses. They are also referred to as Profit and loss statements or P&L statements.

The concept of Income statements can be understood by using a simple example:

  • Suppose an individual wants to start a small-scale parcel delivery service and wants to keep a record of how profitable his business is, he will need to maintain income statements during a subjectively selected time interval which can be a month, a quarter, a year, etc.
  • Profitability is measured by two things (i) the amount that is earned by the enterprise i.e. revenues (ii) the expense involved in making those revenues.
  • The purpose of the income statement is to reflect the firm’s profit or loss during the specified period. The difference between the revenues and expenses is calculated and labeled as Net Profit or Net loss. This difference is also referred to as the Bottom Line.
  • One important point to note regarding the income statements is that it shows revenues, gains, expenses, and losses and not the cash received and cash disbursed. Suppose the firm does 100 deliveries in a month at $4 per delivery. The amount earned by the firm i.e. $400 is its revenue. It does not matter when the payments are received by the firm.

Revenue and Gains include:

  1. Revenue from primary activities that are directly related to the activities of the firm for e.g. the revenue made by executing the deliveries.
  2. Revenue from secondary activities for e.g. interest earned on idle cash deposits.
  3. Gains that are incurred by activities such as selling long term assets that are usually outside the primary activities of the business for e.g. selling an old delivery vehicle at a cost greater than its depreciated value.

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Expenses and Losses include:

  1. The expense involved in primary activities.
  2. The expense involved in secondary activities.
  3. Losses.

Furthermore, Income Statements are of two types.

  • Single Step Income Statement:

In this type of income statement, all the revenues are grouped together, and all the expenses are deducted at once without drawing any intermediate subtotals. Example of Single Step Income Statement is given below.

  • Multiple Step Income statements:

These type of income statements contains one or more subtotals that can highlight some important relationships within the group.

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Example of Multiple Step Income Statement of Nestle Group for 2018 is given below.

Author: Abhay Kanodia

About the Author: An undergraduate student from the Birla Institute of Technology and Sciences, Pilani (BITS Pilani). Exploring the fields of finance and data analytics and it’s applications in other different domains.

 

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