Income Statement

Income Statement

Profit & Loss statement or Income Statement shows the operating results of the firm during a specific period of its operation. It focuses on earnings and expenses (or operating activities) of the firm. It exclusively summarizes revenue and expenses of the period and shows the net difference i.e., profit or loss of the period.

Typical format of income statement is depicted in the following image.

• Top-line is companies’ net sales i.e. total revenue generated by operations.
• Cost of goods sold (COGS) is cost incurred in creating the product. Include cost of input materials.
• Gross margin or profit equal to revenue minus COGS
• Operating expenses are general marketing, administrative expenses.
• Operating income or profit is equal to gross profit minus operating expenses. Depreciation & amortization expenses are many times places as a separate line item in the income statement
• Earnings before interest & taxes (EBIT or PBIT) is equals to operating income plus other income & gains minus other expense & losses.
• Earnings after taxes (EAT or PAT) is the profit or loss, after deducting interest expenses and provision for taxes from the EBIT. This is also called as bottom line as it after deducting all expenditures & liabilities from the top line.

Revenue, expenses, gains & losses

Revenue & Expenses	Gains & Losses
Revenues & expenses are result from a company’s principal activities or central operations.	Gains are increase in equity and losses are decrease in equity, resulting from company’s incidental or peripheral economic activities and not from its central operations.
Revenues are usually earned and expenses are incurred during the central operations	Gains and losses are usually realized from non-reciprocal transactions or other economic events not related to an earnings process or central operation
Revenues & expenses are reported gross	Gains & losses are reported net

Depreciation

Depreciation is the systematic allocation of the original cost of an asset to the periods in which the asset provides benefit to the entity. There are two popular methods of estimating depreciation of an asset viz. Straight Line and Reducing Balance Depreciation. A company decides on the depreciation method based on particular asset in context. While Companies Act recognizes both the methods, Income Tax Act generally recognizes only Reducing Balance Depreciation method. Amortization is estimated based on only straight line method.

Net book value (NBV) = Gross book value (GBV) - Depreciation

Gross book value (GBV) = original cost

In straight line method,

Depreciation Rate = (GBV – residual cost) / Number of years of useful life

Depreciation = GBV * Depreciation Rate

In reducing balance method,

Depreciation Rate = 1 – n-th root of (residual cost / original cost)

Where n = Number of years of useful life

Depreciation = NBV * depreciation rate