How to profit from an Income Statement

Students of Accounting regularly struggle with Income Statements layouts and its vital this is overcome by you as these are fundamental to your success in Units 1, 2 & 3. These can easily be worth 15-25% of the paper. Here are the key components broken down and explained: -

Title

The title must have the person’s name and then say for the year ended 31^st December 2012 (or whatever the date is)

Revenue

Revenue - this is the amount a firm has sold – this should be a big figure (usually).

Returns in – these are customer returns and are taken off revenue to give a net sales revenue figure

Cost of Sales

This is the tricky bit. It is not just what you purchased. You are trying to work out how much the goods you sold actually cost you to buy. Since an established business is unlikely to start or end a year with no stock you need to adjust things slightly.

If you start off with 10 items, buy 50 more and have 14 left how many have you sold? Basic maths tells us its 10+50-14= 36 items.

This is basically what we do in Cost of Sales! The layout is as follows.

Cost of Sales

Opening inventory

Add purchases

Add Carriage In (the delivery cost inwards is a direct cost of the goods)

Less Returns out (items you sent back to the supplier)

Less closing inventory (this is not included in the cost of sales as it has not been sold!)

= Cost of sales

Gross Profit

Net Sales Revenue – Cost of Sales = Gross profit (this is the direct profit made from selling the goods) Then you add any account that ends in the word received – these are classed as secondary incomes to give you a new total

Expenses

The expense part is pretty simple. You simply put them all down (in any order), add them up and take away from the total you had after adding gross profit to xxxxxx received. Carriage out is an expense too! Don’t include drawings, inventory or any non-current assets in the expenses. You will usually need to depreciate the non-current assets though.

Notes to the accounts

These are the most important part – worth double marks at least! Remember to change two things – not just one!!

· Accruals of expenses are added to the expense (as long as these were already included in the expense figure) and also go as a Current Liability in the Balance Sheet

· Prepayments of expenses are taken from the expense (as long as these were already included in the figures) and also go as a Current Asset in the Balance Sheet

· Don’t forget to put depreciation in – you will need to work a figure out for the Income Statement. This will be added to the provision already in place in the balance sheet

· A bad debt is an expense – but you also reduce trade receivables

· Closing Inventory is taken off Cost of Sales and put as a Current Asset

· Any item put in the wrong account – take it out and put it in the right one!

Golden rules

• In before out (i.e. ‘returns in’ is always in a section above ‘returns out’. The same applies to carriage.
• Show all workings – some of them will get complicated and working ensure you get marks for what you did right! THIS IS VITAL
  
• Underline key headings
• Use columns – it’s not a shopping list!
• if you have written less - make sure you take it away!
  
• Cut up an Income Statement (there is one shown below to print 2 copies of) and practice putting them in order and comparing with your answer. Do it once a day for 3 weeks and you will crack it!!

Nial Satis - Income Statement for the year 31^st December 2012

£ £ £

Sales Revenue ......

Less Returns In ......

Net Sales Revenue ...... (a)

Cost of Sales

Opening Inventory ......

Purchases ......

Carriage in ......

Less Returns Out ......

Net purchases ......

Less Closing inventory ......

Cost of sales ...... (b)

Gross profit (a) – (b) = ...... (c)

Add income:

e.g. Discounts received ...... (d)

(c) + (d) ...... (e)

Less expenses: (these are examples – there may be more!)

Vehicle running expenses ......

Rent & Rates ......

Insurance ......

Discounts allowed ......

Carriage out ......

Provision for depreciation of fixed assets ......

Bad debts written off ......

(Total expenses) ...... (f)