What an income statement shows
An income statement (also called a profit and loss account) records a business's revenue, costs and profit over a period of time, usually a year. It shows how much the business earned from selling goods and services and how much it cost to run, ending with the profit or loss.
Key idea
Gross profit = revenue − cost of sales. Profit for the year (net profit) = gross profit − expenses (overheads such as rent, wages and marketing).
The main lines
- Revenue — the value of all sales made in the period.
- Cost of sales — the direct cost of the goods actually sold.
- Gross profit — revenue minus cost of sales.
- Expenses — running costs not directly linked to making the product.
- Profit for the year — what is left after all costs are deducted.
Example
Revenue is RM50000 and cost of sales is RM30000, so gross profit is RM20000. Expenses are RM12000, so profit for the year = 20000 − 12000 = RM8000.
Using the income statement
Owners use it to judge performance and compare years. Lenders check whether the business is profitable enough to repay a loan. Managers can see whether costs need to be controlled. Profitability is often measured with the gross profit margin = (gross profit ÷ revenue) × 100.
Remember
- Gross profit = revenue − cost of sales.
- Profit for the year = gross profit − expenses.
- An income statement covers a period, not a single moment.