IncomeStatementAims:1.Explainhowaccountantsmeasureincome.2.Tointroducetheaccountingconceptswhichgovernprofitmeasurement.3.Tounderstandtheimportanceofgrossprofit.4.ToconstructtheincomestatementofaSoleTrader.7.1

IncomeStatement:IntroductionIncomestatementaccount(alsocalledtheprofitorlossaccount)isareportpresentingallfiguresconcerningrevenue,costandexpenseaccumulatedduringawholeyear.7.2

AccrualbasisInaccordancewiththeaccrualsconceptprofitiscalculatedbymatching:(1)Incomeearnedduringtheperiod(whetherreceivedornot);(2)Expensesrelatingexclusivelytotheperiod/usedup(whetherpaidforornot).7.3

TheCalculationofProfitInaccordancewiththeaccrualsconceptprofitiscalculatedbymatching:(1)Incomeearnedduringtheperiod(whetherreceivedornot);(2)Expensesrelatingexclusivelytotheperiod/usedup(whetherpaidforornot).7.4

PeriodicitThelifeofthebusinessissub-dividedintoaccountingperiodsTHELIFEOFANYBUSINESS(YEARS)Howshouldprofitforyear3becalculated?AccrualsConcept(Matchingconcept)Incomeforyear3LessExpensesforYear3=ProfitforYear37.5

ComponentsofanIncomeStatement

Sales/revenuerepresentstheamountearnedfromsalesorservices.CostofGoodsSold(COGS)includesalldirectcoststhatcanbetracedorassignedtogoodssoldorservicesprovided.GrossProfitisdefinedasSales/RevenueminusCostofGoodsSoldOperatingexpensesincludemarketing,advertising,andpromotionexpenses,generalandadministrativeexpenses,depreciationandamortizationexpenses.OperatingIncomemeasurestheprofitabilityofregularbusinessoperations.Itistheprofitbeforeanyadjustmentforinterestandtaxes.7.6

ARealExampleofanIncomeStatement

YoucanlearnitfromthevideobyscanningtheQRcode.7.7

AboutIAS1InternationalFinancialReportingStandards(IFRS)issuedbytheInternationalAccountingStandardsBoard(IASB)arewidelyused.TheIASBissuedIAS1PresentationofFinancialStatementswhichspecifieswhatshouldbeincludedinastatementofprofitorlossandincludesasuggestedformat.

20×220×1

$?000$?000Revenue××Costofsales(×)(×)Grossprofit××Otherincome××Distributioncosts(×)(×)Administrativeexpenses(×)(×)Otherexpenses(×)(×)Financecost(×)(×)Profit

before

tax××Incometaxexpense(×)(×)Profit

for

the

year××Othercomprehensiveincome:

Gainsonpropertyrevaluation××Total

comprehensive

income

for

the

year××7.8

TheImportanceofGrossProfitIncomestatementforMonth1Sales(3units@1.5$4.5LesscostofsalesPurchase(5@1)$5.00Lessclosingstock(2@1)$2.00$3.00Grossprofit1.5$7.9NextMonth:Example(Continued)Month2:Purchases7articles@$1.00Sales8articles@$1.50

Required:CalculatetheGrossProfitforMonth2.IncomestatementforMonth2$$Sales(8units)12.0LessCostofSales:OpeningStock(2units)2.00AddPurchases(7units)7.00(Availableforsale9units)9.00LessClosingStock(1unit)1.008.00GrossProfit(33.33%)4.007.10

ThePreparationoftheFinalAccountsofaSoleTraderTrial

Balance

as

at

December

31st,2012$$Stock

at

Jan.

1st,20124

000Purchases50

560Sales74

130Wages

and

salaries13

700Rent

received1

290Rates2

960Office

expenses2

500Telephone1

500Trade

Debtors8

950Trade

Creditors3

860Office

equipment5

980Motor

vehicles9

800Drawings15

960Cash

at

bank4

970Sammy

s

capital41

600120

880

120

880IncomestatementfortheyearendedDec.31st,2019Sales$74

130Less

Cost

of

Sales:4

000Opening

stock50

560Add

Closing

stock54

5604

69049

870Gross

Profit24

260Add

Other

Income1

290Rent

received25

550Less

OverheadsWages13

700Rates2

960Office

expenses2

500Telephone1

500

20

660

Net

Profit

4

890

BusinessBalanceSheetAsatDec.31st,2019Current

Assets

Cash

&

Bank$4

970Trade

Debtors8

950Stock4

69018

610Fixed

AssetsOffice

Equipment5

980Motor

Vehicles9

80015

780Creditors:

amounts

due

within

one