What is the Income Statement?
The income statement is also known as a profit and loss statement, statement of operation, statement of financial result or income, or earnings statement. An income statement is a financial statement that shows a company’s income and expenditure.
The income statement/ profit and loss account start with the credit from the trading account in respect of gross profit or debit in respect of the gross loss.
Therefore, all those expenses or losses which have not been debited to the trading account are debited to the Profit and Loss account. If there is any income besides the gross profit, it will also be transferred to the credit of the Profit and Loss Account.
Importance of an Income Statement
- An income statement helps the company to know whether they are generating profit or loss and also helps in effective future strategies.
- The purpose of preparing the Trading and Profit and Loss Account is that the expenses and incomes for the full trading period are taken into consideration.
- Expenses incurred but not yet paid, income earned but not received all are considered and show a true picture.
Format of Trading & Profit and Loss Account
| Dr. Trading account for the year ended March 31, 2021 Cr. | |||
|---|---|---|---|
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
| To Opening Stock A/c | 2,00,000 | By Sales A/c | 50,000 |
| To Purchases A/c | 15,00,000 | By Closing Stock A/c | 2,70,000 |
| To Wages A/c | 10,00,000 | ||
| To Fuel and Power A/c | 3,00,000 | ||
| To Factory Lighting A/c | 20,000 | ||
| To Gross Profit transferred to rofit and Loss Account (Balancing figure) | 22,50,000 | ||
| 52,70,000 | 52,70,000 | ||
| Dr. Profit and Loss Account for the year ended March 31, 2021 Cr. | |||
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
| To Salaries A/c | 7,00,000 | By Gross Profit transferred from Trading Account (Brought Down) | 22,50,000 |
| To Discount Allowed A/c | 50,000 | By Discount Received Account | 3000 |
| To Advertisement A/c | 5,00,000 | ||
| To Sundry Office Expenses A/c | 4,00,000 | ||
| To Net Profit transferred to Capital A/c (Balancing figure) | 6,30,000 | ||
| 22,80,000 | 22,80,000 | ||
What is Trading Account?
Trading Account includes all direct expenses and incomes. These expenses are incurred for the company’s core business operations. And income from the company’s core business. They are directly related to the production of the products sold or services rendered.
Examples
Wages, Factory Rent, Fuel, Raw material purchased, carriage inward, freight, octroi, cartage, purchases, sales, etc.
What is Profit and Loss Account?
The profit and loss account includes all indirect expenses and incomes. It is not directly related to the core business operations of a firm. It includes all expenses and incomes other than those related to the production of the products sold or services rendered. Indirect Expenses are necessary to keep the business running.
Examples
Salaries, Electricity bills, Telephone bills, carriage outward, Depreciation, etc.
What's the difference between Salary and Wages?
- In Accounting, salary is considered as indirect Expenses and wages are considered as direct expenses.
- Salary is paid to employees who are engaged in administrative or office work and is paid on a monthly basis and wages are paid to laborers who are engaged in manufacturing processes and work on an hourly or daily basis.
- Salary remains fixed as it is decided in the beginning, whereas wages differ as it depends on the performance of the laborers (i.e., daily or hourly basis).
