An Introduction to Income Statements
- An income statement records the income and costs of a business incurred over a period of time (usually one year)
- The statement is also known as a profit-and-loss account
- The statement is also known as a profit-and-loss account
- Four types of profit are calculated in the income statement
- Gross profit, net profit, profit after tax, and retained profit
- Gross profit, net profit, profit after tax, and retained profit
- The extract from the income statement for Toys and Trikes PLC shows figures for both 2022 and 2023, which enables year-on-year comparisons to be made
Diagram: Income Statement for Toys and Trikes Ltd
Four different types of profit are calculated in an income statement
The Main Features of an Income Statement
Sales Revenue
- Money generated through selling goods and services
- Calculated by Price x Quantity
- In 2023, Toys and Trikes Ltd earned Sales Revenue of $274,000
Cost of Sales
- The cost of producing or buying in the goods actually sold by the business during a time period
- Includes the costs of raw materials and labour used to produce the goods
- In 2023, Toys and Trikes Ltd had Cost of Sales of $169,000, which included materials and labour
Gross Profit
- Gross profit is made when revenue is greater than the cost of sales
- Calculated by Sales Revenue - Cost of Sales
- The Gross Profit for Toys and Trikes Ltd was therefore $274,000 - $169,000 = $105,000
Net Profit
- Profit made by a business after all costs have been deducted from revenue
- Calculated by Gross Profit - Expenses
- In 2023, Toys and Trikes Ltd made a gross profit of $105,000
- It had expenses of $48,000, which included advertising and equipment
- The Net Profit was therefore $105,000 - $48,000 = $57,000
Profit after Tax
- The income statement for limited companies needs to account for corporation tax paid on net profits
- In 2023, Toys and Trikes Ltd made a Net Profit of $57,000
- The tax payable was $11,000
- The Profit after Taxes was therefore $57,000 - $11,000 = $46,000
Retained Profit
- Profit remaining for reinvestment into the business after any dividends have been distributed to shareholders
- In 2023, Toys and Trikes Ltd made a Profit after Tax of $46,000
- The dividends payable were $22,000
- The Retained Profit was therefore $46,000 - $22,000 = $24,000
