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The Income Statement for companies

The income statement shows calculation of profit from income and expenses of anaccounting period. (Profit = income expenses)

The profit or loss is calculated in the profit and loss ledger account. The income taxexpense of the company is subtracted and the profit after taxis transferred to a retained

earnings ledger account.

A retained earnings account is used to

distribute the profit to the shareholders as dividends

set aside profit for a specific purpose such as a an asset replacement reserve

set aside a general reserve for expansion of the business

The balance in the retained earnings account is a reserve. (Undistributed profit)

Example:

Show the following information in the Profit and Loss and Retained Earnings ledgeraccounts.

$000Total income 30Total Expenses 20

Income Tax 30%Dividends 5Transfer to General Reserve 2Retained Earnings Crbalance(brought forward from previousyear)

3

Profit and Loss account

$000 $000

Expenses IncomeIncome Tax

Net profit after tax


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Retained Earnings$000 $000

Dividends Balance b/d

General Reserve Net Profit after Tax

Balance c/d

Statement of Comprehensive Income

Comprehensive income is defined in AASB 101 as the change in equity

during a period arising from transactions and events other than the

contribution and withdrawal of capital.

These changes include gains or losses from

1. Profit or loss from trading operations

2. Revaluation of non-current assets (most often land)

(Gains /losses on foreign currency and financial assets and liabilities are

not in the syllabus)

Format

The standard does not specify a format. However the implementation

guidance notes of the standard give alternative layouts that may be used

by companies. The following is a simplified layout.


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Home Slice Bakeries LimitedStatement of Comprehensive Income

for the year ended 30 June 2029

Sales 692,000

Less Cost of Sales (272,800)

Gross Profit 419,200

Add Other Income 8,300

Less Finance Expenses (5,200)

Less Other Expenses (390,150)

Profit before Tax 32,150

Less Income Tax Expense (9,645)

Profit $22,505

Add Other Comprehensive Income

Gain on asset revaluation, net of income tax 37,000

Total Comprehensive Income for the Period $59,505

Note: AASB 101 requires that finance expenses must be disclosed separately. The other expensesconsist of selling and distribution and administration.

Income

This is the income from the main activity of the company.

Examples Sales Service income / Fees

Other income

This is additional income from activities not related to the main activity

Examples Interest received Dividends received

Gain on disposal of assets Rental income


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Classification of expenses

Expenses are classified to give more information about business costs.

A manufacturing or retailing business is more likely to classify expenses

according to function.

Cost of goods sold

Opening inventory + Purchases Closing inventory

The COGS is calculated when the periodic inventory system is used.

A service business will not have this item because they do not sell

products.

Selling and distribution

These are expenses related to marketing, transport and distribution ofitems the company sells.

Examples Advertising Delivery / carriage outwards

Sales commissions Depreciation of delivery vehicles Doubtful debts Discount allowed

Administration expenses

This is the cost of running administrative support systems.

Examples

Rent of office Salaries


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Office supplies Depreciation of fixtures/ fittings

Finance costs

This is the cost of financing the business.Examples

Loan Interest expense debenture interest expense

Company Income Tax

This forms the final section of the income statement.A company, like a person, pays income tax on the profit that it makes. InAustralia the company income tax rate is 30%

Income tax is calculated annually by the company and is entered in theprofit and loss ledger account as an expense.

The income tax expected to be paid is also shown as a liability in thebalance sheet as Current tax liability

1. Income tax payable calculated on profit before tax

Dr Income TaxCr Current tax liability

2. Income Tax, closed to Profit and Loss account

Dr Profit and LossCr Income Tax

3 When paid in the following period

Dr Income taxCr Bank


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Balance day adjustments

The aim of balance day adjustments is to match income with relatedexpenses and accurately include them in the time period they had aneconomic effect on the company.

This is done when profit is calculated on an accruals basis rather than acash basis

Balance day adjustments are made for the following reasons.

Prepayments

Prepaid expense: The business has paid an expense in advance.

Unearned income or income received in advance: The business receivedincome it has not yet earned

Accruals

Accrued expense: The business owes money for an expenseAccrued income: The business has earned income it has not received.

ProvisionsDepreciation : the portion of an assets cost allocated as an expense for the

periodDoubtful debts: an estimation of debts (related to the credit sales of theperiod) likely to go bad


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Summary: Income and Expense balance day adjustments

Balance day adjustments DR CRAccount Nature Account Nature

Prepaid Expense Expense E+ Prepaid Exp A-

Accrued Expense Expense E+ Accrued Exp L+

Unearned income UnearnedIncome

L- Income I+

Accrued Income AccruedIncome

A+ Income I+

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