LOS A requires us to:
describe the components of the income statement and alternative presentation formats of that statement.
There are three major components of an income statement, namely, Revenue, Expenses, and Profits or Margin.
These components can be explained as follows:
1. Revenues
a. Revenues generally form the first line of the income statement.
b. It is also often known as turnover or sales (net of returns/allowances).
c. These are the amount charged or expected to be received against the goods or the services provided by the business entity.
2. Expenses
a. Expenses are outflows, depletion of assets, or incurrence of liabilities that happens in the course of business.
b. There are different types of expenses that are incurred in the course of business. These may be grouped or reported differently.
i. Some businesses present all the items of expense with a bracket [($)] sign around, indicating that this is an amount of expense that needs to be subtracted in the income statement. Others show the amount of expense in their respective heads, assuming that it is implicit that the expense items would be subtracted.
ii. The expenses may also be grouped under different categories: either by nature or by function.
iii. When the expenses of similar types are grouped under the same head, they are called ‘grouped by nature’. For example, all types of marketing expenses (fixed or variable) are clubbed together in such a grouping.
iv. Sometimes the expenses may also be grouped by functions such as all the primary or manufacturing expenses and others as the operating expenses etc.
3. Gains or Losses
a. The increase or decrease in the economic benefit to the business entity during the year is referred to as the gain or loss to it, respectively.
b. The gains or losses include all the benefits and the costs arising, both as a result of operating as well as the non-operating business activities.
c. The net income of the business can be calculated as:
i. Net Income = Income – Expenses; or
ii. Net Income = Revenues + Other Income – Expenses; or
iii. Net Income = Revenues + Other Income – Expenses in Ordinary Activities – Other Expenses.
d. The last of the above equations can also be written as:
Net Income = (Revenues in ordinary activities- Expenses in ordinary activities) + (Other Income – Other Expenses) + (Gains- Losses)