CHAPTER 2

INCOME STATEMENT
LEARNING OBJECTIVES

By the end of this chapter, and having completed the essential reading
and activities, you should be able to:

o Understand the terminology used in an income statement, and

some of the principal conventions used in presenting it.
o Be able to draw up an income statement for a sole trader from
a trial balance and additional notes.
o Be able to understand and comment on the basic information
conveyed by an income statement.

INTRODUCTION

The major financial accounting statements aim to provide a picture of

the financial position and performance of a business. To achieve this, a
business’s accounting system will normally produce three financial
statements on a regular, recurring basis. These three statements are
concerned with answering the following questions relating to a
particular period:

 What cash movements took place?

 How much wealth was generated?
 What is the accumulated wealth of the business at the end of
the period and what form does it take?

To address each of the above questions, there is a separate financial

statement. The financial statements are:

 The income statement (also known as the profit and loss

account);
 The statement of financial position (also known as the balance
sheet);
 The statement of cash flows.

Together they provide an overall picture of the financial health of the

business.
Income Statement is a financial statement for companies that
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indicates how net 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
being reported. Also called Profit and Loss Statement (P&L) outside
the USA or Statement of Activities and Changes in Net Assets in
reference to charitable organizations.

This will be the typical format of an Income Statement:

AEDYA’S CLOSET
INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20xx
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 RM RM RM
Sales xxx
(-) Return inwards xxx
xxx
COST OF GOODS SOLD:
Opening inventory xxx
Purchases xxx
(-) Return Outwards (xxx) xxx
(+) Carriage Inwards xxx
xxx
(-) Closing inventory (xxx) (xxx)
GROSS PROFIT xxx
ADD INCOME:
Discount received xxx
Rent received xxx
Decrease in Provision of Bad
Debts xxx xxx
xxx

(LESS) EXPENSES:
Salaries and wages xxx
Rent and rates xxx
Carriage outwards xxx
Insurance xxx
Misc. expenses xxx
Lighting and heating xxx
Bad Debts xxx
Increase in provision for bad xxx
debts
Provision for depreciation xxx xxx
NET PROFIT xxx

I N CO M E S T A T E M E N T F O R A S O L E T R A D E R

The income statement of a trading business splits into two parts:

firstly the profitability of the buying and selling processes are shown in
the trading account, to arrive at a figure of gross profit, and then all
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the other expenses of the business are deducted to arrive at a net
profit.

First, we will look at the calculation and presentation of the upper part
of the income statement to arrive at gross profit. This part of the
financial statement is known as the trading account.

Example 2.1

Beatrice Enterprise
Trial Balance as at 31 December 2017
Debit Credit
RM RM
Purchases 24,000
Sales 55,300
Inventory (1 January 2017) 2,100
Rental expenses 7,500
Interest expenses 500
Salaries and wages expenses 14,200
Depreciation expenses 800
Admin and general expenses 7,000
Capital 30,000
Drawings 700
Furniture 4,300
Accumulated depreciation – Furniture 300
Vehicle 20,500
Accumulated depreciation – Vehicle 400
Cash in bank 2,500
Trade receivables 3,100
Trade creditors 1,200
87,200 87,200
Inventory at 31 December 2017 was RM3,200

Note:
1) Inventory value in the trial balance refers to the inventory at
the beginning of the accounting period.
2) Inventory value at the end of the period is shown in the notes
to the accounts and not in the trial balance.

Beatrice Enterprise
Income Statement for the year ended 31 December 2017
RM RM

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QUESTION 1

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From the following trial balance of Meg Ryan after her first year’s
trading, you are required to draw up an Income Statement for the
year ended 30 June 2020.

MEG RYAN
TRIAL BALANCE AS AT 30 JUNE 2020
DEBIT CREDIT
Sales 28,794
Purchases 23,803
Rent 854
Lighting and heating expenses 422
Salaries and wages 3,164
Insurance 105
Buildings 50,000
Fixtures 1,000
Trade receivables 3,166
Sundry expenses 506
Trade payable 1,206
Cash at bank 3,847
Drawings 2,400
Motor vans 5,500
Motor running expenses 1,133
Capital 65,900
95,900 95,900
Inventory at 30 June 2020 was RM4,166.

Net profit: RM2,973

Question 1:
SOPHIE
Trial Balance as at 31 December 2017

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 DEBIT RM CREDIT RM
Capital 15,000
Sales 35,000
Wages 15,000
Hair products purchased 5,000
Rent of salon 6,000
Light and heat 1,500
Drawings 6,500
Fixtures and fittings 7,000
Trade payables 250
Bank account 9,250
50,250 50,250

REQUIRED: Categorize each of the items in Sophie’s trial balance into

one of the types of accounts.

Net profit = RM7,500

Question 2:

Norbert runs a small wholesaling business, selling imported Italian

coffee machines to retailers. His business is run from a small
warehouse with an office at the side on an industrial estate on the
edge of a large city. The industrial estate is largely deserted at night
and the crime rate is high for theft and criminal damage. Norbert has
recently joined a scheme run by the local authority on behalf of
tenants of its industrial units; he pays an annual contribution to a fund
which pays for improved lighting and security patrols.

Norbert’s accounting year-end is 31 March. He provides you with a list

of figures relating to the most recent year which ended on 31 March
2017. You are required to prepare an income statement from the
figures.

RM
Delivery vehicle 5,020
Revenue for the year 351,777
Staff costs: storeman’s wages 12,090
Electricity 2,821
Cash at bank 3,444
Capital at 1 April 2016 18,011
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 Administrative costs 3,810
Opening inventory 20,762
Non-current assets in warehouse & office 3,900
Drawings 25,219
Sundry expenses 1,406
Warehouse and office rental 10,509
Insurance 3,909
Trade receivables 36,623
Water rates 1,226
Security services charge 2,937
Purchases 255,255
Bank charges 398
Trade payables 31,950
Delivery expenses 8,630
Part-time admin assistant’s wages 3,779

Norbert counted and valued the coffee machines on the premises at

the 31 March 2017. The total value was RM22,446.

Gross Profit: RM98,206

Net Profit: RM46,691

WEEK 3: TUTORIAL QUESTION

QUESTION 1

Kim has drawn up the trial balance at the end of the first year trading,
as shown below:

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 Kim’s Sports
Trial Balance as at 31 December 2017
Debit RM Credit RM
Capital 10,000
Loan 12,000
Sales 51,000
Purchases 34,500
Electricity 1,920
Insurance 1,750
Telephone 1,500
Sundry expenses 1,650
Drawings 7,200
Accountant’s fees 1,500
Printing machine 5,500
Delivery costs 1,200
Computer 3,500
Bank balance 11,080
Trade receivables 4,100
Trade payables 2,400
75,400 75,400

You are required to draw up Kim’s Sports Income Statement for the
year ended 31 December 2017.

Net profit: RM6,980

QUESTION 2

Helga’s trial balance, drawn up at the end of the first year of trading:

HELGA
Trial Balance as at 30 November 2017
Debit RM Credit RM
Capital 50,000
Loan (interest at 5%) 10,000
Sales 235,700

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 Wages 25,200
Purchases 182,400
Rent and rates 15,900
Motor expenses 3,600
Sundry expenses 2,000
Interest on loan 500
Light and heat 1,800
Office expenses 3,100
Drawings 12,000
Motor vehicles 25,000
Fixtures and fittings 18,000
Trade receivables 11,800
Trade payables 10,500
Bank account 4,900
306,200 306,200

You are required to draw up Helga’s Income Statement for the year
ended 30 November 2017.

Net profit: RM1,200

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