What is profit & loss statement? Its features, objectives, uses

Income Statement is the essential financial statement which depicts financial performance as profit earned or loss incurred by the business entity. Income Statement also called profit&loss statement shows profit earned or loss incurred for the financial year of the business entity. Income Statement has essential line items such as Revenues or Sales, Expenses, Losses, Incomes.

Income Statement

Objective of preparation of Income Statement:

The main objective of preparation of Income Statement is to depict the financial performance of the business entity. It means to know profit earned or loss incurred by business entity at year end. Income Statement depicts the financial performance as profit or loss made by the business entity at the year end.It is the responsibility of the management or board of directors to prepare the Income Statements as per the relevant account standards, accounting policies, accounting principles, relevant laws. Income Statement shall give true and fair view of profit or loss of the business entity at the year end. The main purpose of Income Statement is to communicate profitability or financial performance to the users of financial information to take useful decisions. Users of financial information include creditors, debtors, lenders, investors, government, management, public, employees who use read and analyse the Income Statement to take financial decisions.

Components of Income Statement:

The main components of Income Statement include Revenues or Sales, Cost of Goods sold, operating and non operating expenses, other expenses and incomes. Income Statement also called Profit&loss statement has several line items or components where the ultimate result is Net Profit or Loss. Here we calculate the Revenues or Sales and other incomes and cost of goods sold and other expenses. we deduct all expenses from Revenues and incomes to arrive at Net Profit or Net Income at the year end.

Income Statement comprises of Trading account and Profit&loss account where Trading account depicts Gross profit or loss made and Profit&loss account reveals Net profit or loss made at the year end.

Top lines or Revenues = Major Sales or services of the business entity

Cost of Goods sold = (opening stock+purchase of goods+direct expenses)-closing stock

Gross profit = Revenues - Cost of goods sold

Net Income or Bottom lines = Net profit or profit available after deducting all operating & non operating expenses

Earnings per share = Earnings available to equity shareholders (Net income/no. of equity shareholders)

Income statement of Graham Bell traders for the year ended march 2020

                                             Debit $    Credit $
Revenues
GROSS REVENUES (including INTEREST income)             296,397
                                                      --------
Expenses:
  ADVERTISING                                6,300
  BANK & CREDIT CARD FEES                      144
  BOOKKEEPING                                2,350
  SUBCONTRACTORS                            88,000
  ENTERTAINMENT                              5,550
  INSURANCE                                    750
  LEGAL & PROFESSIONAL SERVICES              1,575
  LICENSES                                     632
  PRINTING, POSTAGE & STATIONERY               320
  RENT                                      13,000
  MATERIALS                                 74,400
  TELEPHONE                                  1,000
  UTILITIES                                  1,491
                                                       --------
      TOTAL EXPENSES                                   (195,512)
                                                       --------
NET INCOME                                              100,885 $

   Example:   let us calculate the Earnings per share from the above Net income for the 5000 equity shareholders of a company                        Earnings per share = (Net income/ no. of shares) 100885/5000 = 20.177

WHO USES INCOME STATEMENT:

Income statement is used by management, creditors, lenders, investors, government for different purposes. Management uses Income Statement to know Revenues or Net income or operating and non operating expenses and to control expenses and increase sales or Net profit and management makes useful decisions. Creditors and lenders and banks uses income statement of business entity to know the credit worthiness and profitability and loan repaying capability. Investors uses income statements to make investment decisions. Government uses income statements to levy taxes. Therefore internal and external users make important decisions by using income statement.

Conclusion

Income Statement is the crucial financial statements of business entity to reveal the profitability and financial performance of the business entity. Income statement of business entity helps internal and external users of financial information to make useful decisions.Income statement helps in calculating Net incomes, Revenues and cost of goods sold and operating & non operating expenses & incomes and Earnings per share.

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