Income Statement
An income statement, often referred to in the UK as a profit and loss account (P&L account), is a financial document that summarises a company's revenues, expenses, and profits or losses over a specific period of time, typically a fiscal quarter or year. The main purpose of the profit and loss account is to show the company's financial performance and profitability during the reporting period.
Key components of a profit and loss account include:
Revenue: The total amount of money earned from sales of goods or services, also known as turnover.
Cost of Sales: The direct costs attributable to the production of the goods sold by the company. This includes the cost of materials and labour.
Gross Profit: Calculated as revenue minus cost of sales. It indicates the efficiency of production and pricing.
Operating Expenses: These include selling, general, and administrative expenses (SG&A), such as salaries, rent, and utilities.
Operating Profit: Also known as operating income, this is calculated as gross profit minus operating expenses. It reflects the profit from the company's core business operations.
Other Income and Expenses: This section includes non-operating items such as interest income, interest expense, and any other financial gains or losses not related to the core business activities.
Profit Before Tax: Calculated as operating profit plus other income and minus other expenses.
Tax Expense: The amount of taxes owed to the government based on the profit before tax.
Net Profit: The final line, also known as the "bottom line," representing the company's total profit after all expenses and taxes have been deducted from total revenue.
The profit and loss account is a crucial tool for stakeholders, including investors, creditors, and management, to assess the financial health and operational performance of a business.