The income statement refers to a system that operates the activities and operations of a company or organization and seeks to give a detailed report and evaluation on its performance during a certain year. The statement provides the details of the expenditure and income of the company for the financial year. Where the sales revenue exceeds the costs, there is production of a profit; where there is the occurrence of the reverse, losses results. As such, the statement acts as a profit and loss account. Elemental components of the income statement include the profit considerations, presentation formats, the details, depreciation and profits, taxing matters and capital and revenue.
The profits of a company can refer to the difference between the capital of the company at the start and the conclusion of a given period. The impact of inflation has to be taken into account in order to maintain the purchasing power of the company. Moreover, there has to be sufficient capital to replace the assets and keep the company in continual operations in business. As such, there is maintenance of the company’s physical operating capacity.
The income statement also covers most aspects of the financial year of the involved company. If the main purpose of the income statement is to provide profits for the financial year, it is essential to match the expenditure and income to the financial year of the company in question.
`There should be no assumptions that the data on profits that the income statement displays is represented by the amount of cash at the end of the year (Mast Video Training & Kessel Feinstein, 2007, p. 15). As such, a company can show profits for a certain financial year. Nevertheless, it does not mean that the company has available cash.
Overtrading can occur when the given credit exceeds the taken credit. A given company might be attaining healthy profit margins on the sales. Nevertheless, the company can be offering better and longer terms of credit to its customers.
Many companies, countries or organizations require that their income statements include consistent and comparative figures for the past financial year. For instance, the United States Securities and Exchange Commission requires that the public companies provide comparative data for the current and past two financial years. These figures should be in the annual reports of the companies or the five or ten-year historic performance tables.
The details for the income statements include sales revenue, creation of sales, the costs of sales, change in inventories and gross profits. Others include auditors’ fees, employee details, directors’ remunerations, share options, pensions, operating profits and other incomes from the company’s sales on services and goods.
Depreciation and Profits
The maintenance of capital is an essential aspect of the corporate training. For a company to remain in business, it has to maintain at least current levels of investment in the operating assets and replace the assets, as they become obsolete (Monette & Bisk Publishing Company, 2005, p. 25). The depreciation and profits include straight-line depreciation, reduction in balance depreciation and accelerated depreciation.
The taxing matters include the taxable allowable depreciation, deferred taxation and the reconciling of the books.
Capital and Revenue
The capital and revenue forms essential elements of the income statement. Components of the capital and revenue include interests, operating or financial leases, reserves, contingent liabilities and provisions, retained profits, earnings per share and dividends (PENMAN, 2009, p. 11).
Mast Video Training., & Kessel Feinstein. (2007). Income statement. Johannesburg: Mast Video Training.
Monette, R. L., & Bisk Publishing Company. (2005). The income statement. Tampa, FL: Bisk Pub. Co.
PENMAN, S. H. (2009). Accounting for Intangible Assets: There is Also an Income Statement. Abacus-a Journal of Accounting Finance and Business Studies. doi:10.1111/j.1467-6281.2009.00293.x