The income statement is one of the elements of financial statements. This statement is sometimes called the statement of financial performance because it records and presents the entity’s performance financially from period to period.
For example, if you obtain the entity’s income statement for the period from 01 January to 31 December 2017, you will see how the entity’s financial performance is for that period.
The income statement has its three main elements including revenues, expenses, and profit & loss where it is recorded or report all of the revenues and expenses that occurred in the entity during the period. Profit and losses are the difference between revenues and expenses during the period.
In this article, we will explain detail the four main elements of the income statement as well as the information that each element represent.
Here is the list of four elements of the income statement:
- Profits or Loss
Revenues or sometimes called Sales Revenue. It is the first element of the income statement which represents to total sales that the entity made during the year.
Total sales here not only refer to the sales the entity billed during the year but also include the sales that the entity made yet still not bill. In other words, accrual revenues.
In most cases, the income statement is prepared and presented in two comparative figures.
This is to make sure that the users could gain a better understanding and accurately assess the performance of the entity. Most of the framework of the financial statement also required the entity to have a comparative figure.
For example, if you look at your entity’s income statement, at the line of it you will see Total Sales revenues. And most of the time, there is a comparative figure of it. Let say this year is 2017 and the total revenue for this year is USD 500K.
You might see the comparison of its which is the previous year performance say USD 400K. By using this figure we can say that the sales revenues increase USD100K.
The sub-element of sales revenues is not directly shown in the income statement.
They are normally present in the notes to the income statement. The sub-element of the income statement normally is the class of products or services that the entity offer and sales during the period.
Here is an example:
- Product A = XXX
- Product B = XXX
- Product C = XXX
Total Revenue = XXXX
Expenses are the second element of the income statement. And we normally its records into two different sections. The first one is the Cost of goods sold and send is the operating expenses.
- Cost of goods sold is the costs of goods or services that directly associated with goods or services that entity sold. This kind of expenses is recorded in the after Revenues in order to calculate gross profits.
Here is an example:
Revenues = XXXX
Cost of Goods Sold = (XXXX)
Gross Profit d= (XXXX)
- Operating expenses refer to the expenses that not directly associated with the cost of goods or services. These kinds of services include the depreciation cost, support staff cost, office rental, utility expenses.
Normally, this kind of expense is recorded after gross profits or gross loss. The total operating expenses minus gross profits or gross loss to get net profit or a net loss.
#3 Profits or Loss:
Profits or Loss is also one of the elements of the income statement. However, this element does not have its own treatment or measurement.
It is the result of the residual of other elements of the income statement. Revenues and Expenses. If you check with IFRS financial framework, you will not see this.
In the financial framework, the element of financial statements related to the income statement is only Revenues and Expenses.
Profits or Loss are generally found in the bottom line of the income statement. This is the reason why some people called it the bottom line. The bottom line is the most concern of shareholders.