Three main Elements of Income Statement (Explained)

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:

  1. Revenues
  2. Expenses
  3. Profits or Loss

#1 Revenue:

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.

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Here is an example:

  • Product A = XXX
  • Product B = XXX
  • Product C = XXX

Total Revenue = XXXX

#2 Expenses:

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.

How to Get Net Income From Balance Sheet?

The net income of a company is not directly found on the balance sheet, but rather on the income statement. However, the balance sheet provides important information that can be used to calculate the net income of a company.

To calculate the net income of a company, follow these steps:

  1. Obtain the most recent income statement for the company. The income statement shows the company’s revenue, expenses, and net income for a specific period of time, such as a quarter or a year.
  2. Calculate the company’s total revenue for the same period of time. This information can be found on the income statement.
  3. Calculate the company’s total expenses for the same period of time. This information can also be found on the income statement.
  4. Subtract the total expenses from the total revenue to calculate the company’s gross profit.
  5. Calculate any additional income, such as interest or investment income, that the company earned during the same period of time.
  6. Subtract any additional expenses, such as interest or investment expenses, from the gross profit.
  7. The result of step 6 is the net income of the company for the period of time covered by the income statement.
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It’s important to note that the balance sheet provides important information that can be used to calculate the net income of a company, such as the current assets and liabilities of the company, but it does not provide the net income directly.

The balance sheet shows the company’s financial position at a specific point in time, while the income statement shows the company’s financial performance over a period of time.

Is dividend part of income statement account?

Yes, dividends are typically included in the income statement as they are a distribution of the company’s earnings to its shareholders. Dividends are usually reported under the heading of “Other Income” or “Other Revenues” on the income statement.

The amount of dividends paid is usually disclosed in the notes to the financial statements, which provide additional information about the company’s financial performance and position. It’s important to note that dividends are not considered an expense on the income statement, as they do not represent a cost of doing business, but rather a distribution of profits to shareholders.

Dividends can have an impact on a company’s financial statements, as they reduce the retained earnings of the company, which is shown on the balance sheet. Companies must carefully manage their dividend payouts to ensure they have sufficient earnings and cash flow to support their ongoing operations and growth.

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Is retained earning or accumulated losses part of income statement account?

Retained earnings are shown on the balance sheet as part of the equity section. Retained earnings represent the portion of a company’s earnings that have not been distributed to shareholders as dividends. Instead, they are retained by the company to reinvest in the business or to pay off debt. Retained earnings are calculated by subtracting dividends paid from net income over the life of the company.

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Accumulated losses, on the other hand, are also shown on the balance sheet as a negative number in the equity section. Accumulated losses represent the cumulative losses a company has incurred over time, and they reduce the company’s equity. Accumulated losses are typically the result of sustained losses over a period of time, such as during a recession or in a highly competitive market.

Retained earnings and accumulated losses are not part of the income statement.

While retained earnings and accumulated losses are not part of the income statement, they can have an impact on the income statement. For example, if a company has a large amount of retained earnings, it may use them to invest in research and development, which could lead to increased revenues and profits in the future. On the other hand, if a company has a large amount of accumulated losses, it may have difficulty attracting investors or obtaining credit, which could limit its ability to grow or expand.

How Are Discontinued Operations Reported in the Income Statement?

The income or loss from discontinued operations is typically reported net of tax, and includes any gains or losses on the sale or disposal of the discontinued business or operation. Any expenses related to the discontinued operation, such as restructuring or severance costs, are also included in the income or loss from discontinued operations.

Discontinued operations are reported in the income statement separately from ongoing operations. They are shown as a separate line item below income from continuing operations.

The income statement should clearly identify the discontinued operations and provide a detailed explanation of the reasons for their discontinuation. This information can be included in a note to the financial statements, which provides additional information and context for investors and analysts.

It’s important to note that discontinued operations are only reported if they are a separate major line of business or geographical area that the company has either disposed of or is in the process of disposing of, and if they represent a strategic shift that will have a major impact on the company’s operations and financial results.