Income Statement: Definition, Purpose, Classification, and Example [Notes with PDF]
In this article, we will learn in-depth about the income statement, including its definition, purpose, classification, example, and much more.
What is Income Statement?
A business organization carries out all its activities with the aim of making profits and maximizing profits. At a fixed time interval, usually at the end of the accounting year, the statement that the business organization prepares for its annual results is called the income statement.
Generally, the statement prepared by the business organization to determine the amount of profit or loss made at the end of the period is called the income statement.
If the amount of income is greater than the expense, that extra income is considered to be the profit or profit of the business. On the other hand, if the expenditure is greater than the revenue, this additional expense is considered to be a loss or loss of business.
Thus, it can be argued that the statement by which the profit or loss of a business organization is calculated by calculating the difference between revenue and revenue expenditure is referred to as the income statement.
Purpose of preparation of the income statement
Generally, the income statement is prepared to meet the various objectives of the organization. At present, the main objective of every business organization is to increase the profitability and wealth of the company.
The income statement is prepared for the following purposes:
- In general, it is prepared to calculate the net profit or loss of the business organization.
- The efficiency of the purchase and sale of the business is verified by the calculation of gross profit or loss.
- Management of the organization shall be assessed by assessing the profitability of the business.
- It provides the necessary information to analyze the financial results of the business in order to make decisions on business operations.
- It provides the necessary information on profit or loss to determine the equity of the owners of the organization.
- It provides the users of accounting information with the necessary profitability information.
- It provides information on the reasonable amount of the dividend paid out of the net income earned.
- It provides the necessary information to analyze the financial status of the organization.
- It provides accurate information on profit to attract investors.
- Provides the management authority with accurate and necessary information on the revenue and expenditure of the organization to manage business activities efficiently and smoothly.
Classification of the income statement
The income statement can be divided into two categories.
- Single Step Income Statement
- Multi-Step or Comprehensive Income Statement.
1. Single Step Income Statement
In the single-step income statement, all kinds of revenues and expenses are shown in one step. The net profit or loss of a business is calculated by subtracting the sum of the expenses from the sum of the income.
The single-step income statement can be used very easily and in a short time to calculate the net profit or loss of the business. However, one of the main drawbacks of the single-step income statement is that the gross profit or loss and the operating profit or loss are not known in this statement.
In Single-Step Income Statement:
Net Profit or Loss= Total Revenues-Total Expenses
Example of Single-Step Income Statement
2. Multi-Step or Comprehensive Income Statement
The income statement, which is used to calculate the net profit or loss of a business in several steps is called the multi-step or comprehensive income statement. The gross profit or loss is calculated by subtracting the cost of goods sold from the sale of the multi-step income statement.
The operating profit or loss is then calculated on the basis of the gross profit minus the operating cost. The net profit or loss is then calculated by adding the non-operating income to the operating profit and subtracting the non-operating expenses.
Here again, the operating expenses are divided into two parts:
- Administration expenses.
- Marketing expenses.
In order to calculate the net profit or loss of the business, this income statement is divided into several steps, which is why it is called a multi-step or comprehensive income statement. At the same time, gross profit or loss, operating profit or loss, and net profit or loss are known through the preparation of a multi-step income statement.
The preparation of a multi-step income statement may inform the business organization of its sales performance and management skills and inefficiency.
In Multi-Step or Comprehensive Income Statement:
Gross Profit or Loss= Total Sales-Cost of goods Sold
Operating Profit or Loss= Gross Profit-Operating Expenses
Net Income or Loss= Operating Profit+ Non-operating and other Income- Non-operating and Other Expenses
Example of Multi-Step Income Statement
You can also read:
- Everything about Financial Statement.
- Liabilities and their Classification
- Assets and their classification
