11 Facts About Income Statement That Will Impress Your Boss

Income Statement

The Profit and Loss account summarizes the activities of a company during an accounting period which may be a month, a quarter, six months, a year or longer, and the result achieved by the company. It details the income earned by the company, its cost and the resulting profit or loss. It is, in effect, the performance appraisal not only of the company but also of its management - its competence, foresight and ability to lead.

Sales - Sales include the amount received or receivable from customers arising from the sales of goods and the provision of services by a company. A sale occurs when the ownership of goods and the consequent risk relating to these goods are passed to the customer in return for consideration, usually cash. In normal circumstances the physical possession of the goods is also transferred at the same time. A sale does not occur when a company places goods at the shop of a dealer with the clear understanding that payment need be made only after the goods are sold failing which they may be returned. In such a case, the ownership and risks are not transferred to the dealer nor any consideration paid.

Companies do give trade discounts and other incentive discounts to customers to entice them to buy their products. Sales should be accounted for after deducting these discounts. However, cash discounts given for early payment are a finance expense and should be shown as an expense and not deducted from sales.

There are many companies which deduct excise duty and other levies from sales. There 26
are others who show this as an expense. It is preferable to deduct these from sales since the sales figures would then reflect the actual mark-up made by the company on its cost of production.

Other Income - Companies may also receive income from sources other than from the sale of their products or the provision of services. These are usually clubbed together under the heading, other income. The more common items that appear under this title are:

• Profit from the sale of assets - Profit from the sale of investments or assets.
• Dividends - Dividends earned from investments made by the company in the shares of other companies.
• Rent - Rent received from commercial buildings and apartments leased from the company.
• Interest - Interest received on deposits made and loans given to corporate and otherbodies.

Raw Materials - The raw materials and other items used in the manufacture of a company’s products. It is also sometimes called the cost of goods sold.

Employee Costs - The costs of employment are accounted for under this head and would include wages, salaries, bonus, gratuity, contributions made to provident and other funds, welfare expenses, and other employee related expenditure.

Operating & Other Expenses - All other costs incurred in running a company are called operating and other expenses, and include.

• Selling expenses - The cost of advertising, sales commissions, sales promotion expenses and other sales related expenses.
• Administration expenses - Rent of offices and factories, municipal taxes, stationery, telephone and telex costs, electricity charges, insurance, repairs, motor maintenance, and all other expenses incurred to run a company.
• Others - These include costs that are not strictly administration or selling expenses, such as donations made, losses on the sale of fixed assets or investments, miscellaneous expenditure and the like.

Interest & Finance Charges - A company has to pay interest on money it borrows. This is normally shown separately as it is a cost distinct from the normal costs incurred in running a business and would vary from company to company.

The normal borrowings that a company pays interest on are:
1. Bank overdrafts
2. Term loans taken for the purchase of machinery or construction of a factory
3. Fixed deposits from the public
4. Debentures
5. Inter-corporate loans

Depreciation - Depreciation represents the wear and tear incurred by the fixed assets of a company, i.e. the reduction in the value of fixed assets on account of usage. This is also shown separately as the depreciation charge of similar companies in the same industry will differ, depending on the age of the fixed assets and the cost at which they have been bought.

Tax - Most companies are taxed on the profits that they make. It must be remembered however that taxes are payable on the taxable income or profit and this can differ from the accounting income or profit. Taxable income is what income is according to tax law, which is different to what accounting standards consider income to be. Some income and expenditure items are excluded for tax purposes (i.e. they are not assessable or not deductible) but are considered legitimate income or expenditure for accounting purposes.

Dividends - Dividends are profits distributed to shareholders. The total profits after tax are not always distributed – a portion is often ploughed back into the company for its future growth and expansion. Companies generally pay an interim and / or final dividend. Interim dividend usually accompanies the company’s interim financial statements. The final dividend is usually declared after the results for the period have been determined. The final dividend is proposed at the annual general meeting of the company and paid after the approval of the shareholders.

Transfer to Reserves - The transfer to reserves is the profit ploughed back into the company. This may be done to finance working capital, expansion, fixed assets or for some other purpose. These are revenue reserves and can be distributed to shareholders as dividends.

Contingent Liabilities - Contingent liabilities are liabilities that may arise up on the happening of an event. It is uncertain however whether the event itself may happen. This is why these are not provided for and shown as an actual liability in the balance sheet. Contingent liabilities are detailed in the Financial Statements as a note to inform the readers of possible future liabilities while arriving at an opinion about the company. The contingent liabilities one normally encounters are:

• Bills discounted with banks - These may crystallize into active liabilities if the bills are dishonoured.
• Gratuity to employees not provided for
• Claims against a company not acknowledged or accepted o Excise claims against the company etc.

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