Income Statement: Definition, Sample & Elements

Following Free Online Accounting Training Lecture on Income Statement will help you to understand:

  • Meaning & Definition of Income Statement
  • What is Profit & Loss Statement (P & L)
  • Sample Format of Income Statement
  • Elements of Income Statement
  • Parts of Income Statement

The Income Statement which is also known as Profit and Loss Statement (P&L) or Earnings Statement or Statement of Financial Performance reports the revenues and expenses for a particular accounting period of time. The reporting process of revenues and expenses are based on the matching principle. This principle states that expenses should be matched with revenue in the same accounting period when revenue is earned. From The income statement we also get reports regarding the excess of the revenue earned over the expenses happened. This surplus of the revenue in excess of the expenses is called net income. If the expenses exceed the revenue, the difference is called net loss. Net income for a period increases in the owner’s equity (capital) for the period, whereas a net loss decreases in the owner’s equity (capital) for the period. The order of recording the expenses in the income statement can vary business to business. Some companies maintain the order of monetary amount of expenses, some companies list the expenses according the importance of items for their companies.

There are three main elements of income statement which are:

  • Revenue
  • Expenses
  • Net Income or Net Losses.

Revenues: Revenue is the most important element of income statement. Revenue is considered as the amount of assets which is occurred through the operational activities of any business. Revenue can also define as the process which generates the business activities to own asset, asset is acquired not only by cash it also can be acquired on account. Moreover if the owner will invest in the business or if the entity will provide any service to the customer in the exchange of money then revenue also can be earned. But the revenue earning process can be varying according to the nature of business. Suppose Manufacturing and merchandising companies earn revenues from the merchandising. A service entity receives revenues from the charge for the services it performs. There are also some procedures of business which generate the earning revenue such as from rent collection or interest charge. If the company provide any service on cash or on account both are the assets for the company because it is expected that customer will pay in the future at particular date. Revenues increase in total assets of any business entity. These new assets do not have any liability obligation that means these assets are owned by owners resulting increase in owners’ equity.

Expenses: expenses are considered as the monetary amount of assets which is consumed through business activities of any company. Expenses are incurred from the costs which are occurred through the process of earning revenue. The two most common examples of expenses are employee salaries and utilities that are used during an accounting period. For some companies the main expenses are the cost which are incurred for providing services or goods to the customers. Revenues does the reverse function of expense, expense decrease assets and owner’s equity. But the most important thing for determining the expense and revenues for any company in the accounting system is that all inflows of assets are not revenues and all outflows of assets are not expenses. For example, cash that are borrowed from bank in that inflow but it is not revenue rather a liability. On the other hand cash which is an asset can be paid for supplies items that are not expense rather an exchange of one asset to another.

Net Income/Net Loss: Net income is the earning or profit of any company which resulted from the business performance of operational activities. Net income reflects the company s economic events of revenue earning process ant the expenses cost which are incurred in the process of earning revenue during a particular accounting period of time. When revenue is greater than expenses then the company experiences net income and when expenses exceed revenues, the difference is called net loss. Net income increase in the owners’ equity as it is considered as the resources for the entity. Reversely a net loss decreases in the owner’s equity. Though both revenue and net income are considered as the resources for the company both increase in the net asset of the company, but there is difference between revenues and net income. Because revenues increase the total resource and expenses are subtracted from revenues to obtain net income or net loss.

Therefore, the revenue is a gross concept, and income (or loss) is a net concept.