Basics of Income Statement

Different Items of Income Statement

Sales

It is the gross amount of goods sold or services rendered during an accounting period.

Net Sales

When sales discount, sales returns and allowances to customers are deducted or subtracted from gross sales the result is net sales.

Cost of Goods Sold

It represents the sum of the costs of all goods which have been sold during the accounting period. It is ascertained by adding the value of unsold goods at the beginning of the year (opening inventory or stock) to the purchases made during the year and the deducting the values of unsold goods at the end of the year (closing inventory of stock) from the purchases. Theses are expired costs, and thus are actual expenses for the year.

Gross Profit

Goods are normally sold at a price that is more than the cost price. Gross profit or gross margin is what remains after cost of goods sold is deducted from net sales. This is the margin that is available to cove the other expenses for a period and to yield net income, if there is any.

Gross Profit = Net sales - Cost of goods sold

Operating Expenses

Merchandising or trading concerns incur operating expenses in addition to cost of goods sold. So, the expenses which are incurred for the generation of revenues from the sales of goods are called operating expenses. Operating expenses may be divided into two:

1.     Selling Expenses: All expenses regarding sale of goods and sending them to the buyer belong to this class e.g. Carriage outwards, advertisements, salesmen's salaries, sales commission, traveling expenses, bad debts, packaging expenses etc.

2.     Administrative Expenses: All expenses connected with the office and its conduct are called administrative expenses. Examples of administrative expenses include office salaries, office rent, electric charges, postage and telegrams, telephones, printing and stationary etc.

Net Operating Income

Operating expenses are deducted from gross profit to arrive at net operating income. Net operating income is what is left after both cost of goods sold and operating expenses for a period have been deducted from net sales. For a merchandising concern, it is what has been earned from the normal operations of buying and selling merchandises.

Net operating income = Gross profit - operating expenses

OR

Net operating income = Net sales - Cost of goods sold - Operating expenses

Other Revenues and Expenses:

Non-sales revenues (which have not been earned by selling merchandise) and non-operating expenses are reported towards the bottom of an income statement under the heading, other revenues and expenses. Included in the revenues are revenue from rentals (rent received), interest income, gain on loss of assets other than merchandise and other miscellaneous revenue items. Under other expenses are interest on borrowed money, loss on sales of assets other than merchandise, and other non-operating expenses and losses.

Net Income:

Other revenues are added to an other expenses are deducted from net operating income to arrive at net income. Net income is what is left after the other revenues have been added to net operating income and other expenses have been deducted from it.

Net income = Net operating income - Other revenues - Other expenses

Or

Net operating income = Net sales - Cost of goods sold - Operating expenses + Other revenues - Other expenses