Chapter 24 : Income Statement

Final accounts

are produced at the end of the financial year and give details of the profit or loss made over the year and the worth of the business.

Limited companies

are required by law to publish their final accounts and these are much more detailed than those required from non-company businesses, such as sole traders and partnerships.

Profit

is an objective for most businesses. In simple terms, profit is calculated by:

Profit = Revenue – Cost of making product

1 increasing revenue by more than costs

2 reducing the cost of making products

3 a combination of 1 and 2.

Why profit is important to private sector businesses

• Reward for enterprise : Successful entrepreneurs have many important qualities and characteristics and profit gives them a reward for these.

• Reward for risk taking : Entrepreneurs and other investors take considerable risks when they provide capital to a business – profits reward them for taking these risks by allowing payments to be made (for example, dividends to shareholders). These payments provide incentives: to business owners to try to make their business even more profitable; to investors to put more capital into profitable businesses.

• Source of finance : Profits after payments to the owners (retained profits) are a very important source of finance for businesses – this allows for expansion (see Chapter 22).

• Indicator of success :When some businesses are very profitable, other businesses or new entrepreneurs are given a signal that investment into producing similar goods or services would be profitable. If all businesses in an industry are making losses, this would not be a good signal to set up in that industry!

An income statement

is a financial statement that records the income of a business and all costs incurred to earn that income over a period of time (for example, one year). It is also known as a profit and loss account

This time period is usually one year but income statements could be constructed monthly too.

The revenue

is the income to a business during a period of time from the sale of goods or services

The cost of sales

is the cost of producing or buying in the goods actually sold by the business during a time period.

A gross profit

is made when revenue is greater than the cost of sales

Gross profit = Revenue – Cost of sales

It is important to note the following:

» Gross profit does not make any allowance for overhead costs or expenses.

» Cost of sales is not necessarily the same as the total value of goods bought by the business.

» Lợi nhuận gộp không bao gồm các chi phí chung hoặc chi phí khác.

» Giá vốn hàng bán không nhất thiết giống với tổng giá trị hàng hóa mà doanh nghiệp đã mua.

Net profit

is the profit made by a business after all costs have been deducted from revenue. It is calculated by subtracting overhead costs from gross profits.

Depreciation

is the fall in the value of a fixed asset over time

Retained profit

is the net profit reinvested back into a company, after deducting tax and payments to owners, such as dividends