Income Statement

Sole traders, partnerships entities or corporate bodies, in one way or the other, engage in the buying and selling of goods (or services). At the end of an accounting period, which is usually a year, a report is prepared to show the financial performance of the trading activities engaged in during the year under reference. This report shows the profit made (or loss suffered) during the year (accounting period).

Thus, a trading account is an account prepared to report the trading activities undertaken during an accounting period. The account is divided into two segments - the trading account section and the Profit or Loss section.

Trading Section

This section of the trading account shows the report of the trading activities such as sales, purchases and the volume of inventory (goods) traded in. it shows how inventory and additional purchases of inventory are matched with the value of sales for the period to reveal the financial performance called the Gross Profit (or gross loss). The end-result of the trading account is gross profit or loss.

Profit or Loss Section

This section shows the matching of the expenses incurred in the running of the business with the gross profit (or loss) from trading section to arrive at Net Profit (or net loss). This is done by deducting all known expenses (for the period) from the gross profit or loss. Thus, the end-result of this section is net profit or net loss.

International Accounting Standard IAS1 - Presentation of Financial Statement joins both the Trading and Profit or Loss sections and refer to them as income statement.

Thus, the combination of both Trading and Profit or Loss Accounts is now known and referred to as income statement or statement of income or statement of comprehensive income or Statement of Profit or Loss and other Comprehensive incomes.

From the foregoing, it is clear that IAS1 does not restrict the use of a particular name for this account (statement).
Example

The following trial balance was extracted from the books of myFATutor Enterprises as at 31^st December, 20x2. 

Required

Prepare the income statement of FATutor Enterprises for the year ended 31^stDecember, 20x2

Suggested Solution

The income statement will now appear as shown below  

The respective notes are shown as follows 

Note

***Capital was not posted (treated) in the above income statement. The reason is that capital is a ‘balance sheet’ item. We suspend treatment of capital until discussion of balance sheet in subsequent chapter.