INCOME STATEMENT &
SR.NO. TOPICS PAGE
1. Income statement 5
2. Items on income statement 6
3. Usefulness and limitations of income 7
4. Balance sheet 8
An Income Statement, also called a Profit and Loss Statement (P&L), is a
financial statement for companies that indicates how Revenue (money
received from the sale of products and services before expenses are taken
out, also known as the "top line") is transformed into net income (the result
after all revenues and expenses have been accounted for, also known as the
"bottom line"). The purpose of the income statement is to show managers
and investors whether the company made or lost money during the period
The important thing to remember about an income statement is that it
represents a period of time. This contrasts the balance sheet, which
represents a single moment in time.
Charitable organizations that are required to publish financial statements do
not produce an income statement. Instead, they produce a similar statement
that reflects funding sources compared against program expenses,
administrative costs, and other operating commitments.
Items on income statement
• Revenue - Cash inflows or other enhancements of assets of an entity
during a period from delivering or producing goods, rendering
services, or other activities that constitute the entity's ongoing major
operations. Usually presented as sales minus sales discounts, returns,
• Expenses - Cash outflows or other using-up of assets or incurrence of
liabilities during a period from delivering or producing goods,
rendering services, or carrying out other activities that constitute the
entity's ongoing major operations.
• General and administrative expenses (G & A) - represent expenses to
manage the business (officer salaries, legal and professional fees,
utilities, insurance, depreciation of office building and equipment,
office rents, office supplies)
• Selling expenses - represent expenses needed to sell products (e.g.,
sales salaries, commissions and travel expenses, advertising, freight,
shipping, depreciation of sales store buildings and equipment)
• R & D expenses - represent expenses included in research and
• Depreciation - is the charge for a specific period (i.e. year, accounting
period) with respect to fixed assets that have been capitalized on the
USEFULNESS AND LIMITATIONS OF INCOME STATEMENT
Income statements should help investors and creditors determine the past
performance of the enterprise, predict future performance, and assess the
capability of generating future cash flows.
However, information of an income statement has several limitations:
• Items that might be relevant but cannot be reliably measured are not
reported (e.g. brand recognition and loyalty).
• Some numbers depend on accounting methods used (e.g. using FIFO or
LIFO accounting to measure inventory level).
• Some numbers depend on judgments and estimates (e.g. depreciation
expense depends on estimated useful life and salvage value).
In financial accounting, a balance sheet or statement of financial position is
a summary of a person's or organization's balances. Assets, liabilities and
ownership equity are listed as of a specific date, such as the end of its
financial year. A balance sheet is often described as a snapshot of a
company's financial condition. Of the four basic financial statements, the
balance sheet is the only statement which applies to a single point in time.
A company balance sheet has three parts: assets, liabilities and shareholders'
equity. The main categories of assets are usually listed first and are followed
by the liabilities. The difference between the assets and the liabilities is
known as equity or the net assets or the net worth of the company;
according to the accounting equation, net worth must equal assets minus
Another way to look at the same equation is that assets equal liabilities plus
net worth. This is how a balance sheet is presented, with assets in one
section and liabilities and net worth in the other section. The sum of these
two sections must be equal; they must "balance".
Records of the values of each account or line in the balance sheet are usually
maintained using a system of accounting known as the double-entry
A business operating entirely in cash can measure its profits by
withdrawing the entire bank balance at the end of the period, plus any cash
in hand. However, real businesses are not paid immediately; they build up
inventories of goods and they acquire buildings and equipment. In other
words: businesses have assets and so they can not, even if they want to,
immediately turn these into cash at the end of each period. Real businesses
owe money to suppliers and to tax authorities, and the proprietors do not
withdraw all their original capital and profits at the end of each period. In
other words businesses also have liabilities