The Income Statement

The Income Statement

What is an Income Statement?

An income statement is an important financial document. It shows how much money a business made or lost during a period of time. In the UK, some people also call it a "profit and loss account" or "P&L".
What Does It Show?

The income statement has three main parts:

1. Revenue (or Sales)

This is all the money the business received from selling products or services. For example, if a shop sold £10,000 worth of clothes, the revenue is £10,000.

2. Expenses (or Costs)

These are all the costs of running the business. This includes:
• Rent for the shop or office
• Wages for employees
• Electricity and water bills
• Materials and supplies

3. Profit (or Loss)

This is what remains after you subtract expenses from revenue. If revenue is bigger than expenses, the business made a profit. If expenses are bigger than revenue, the business made a loss.

A Simple Example

Here is a simple income statement for a small café:
• Revenue: £5,000
• Expenses: £3,500
• Profit: £1,500

The café earned £5,000 from selling food and drinks. It spent £3,500 on ingredients, rent, and staff. So it made a profit of £1,500.

Types of Expenses

Businesses have different types of expenses. Some common ones include:

Cost of Sales - This is the direct cost of making or buying the products you sell. For a baker, this includes flour, sugar, and other ingredients.

Operating Expenses - These are the costs of running the business day-to-day. This includes rent, wages, insurance, and advertising.

Other Expenses - These might include bank charges, interest on loans, or repairs to equipment.

Gross Profit and Net Profit

Many income statements show two types of profit:
Gross Profit = Revenue - Cost of Sales

This shows how much money is left after paying for the products you sold.
Net Profit = Gross Profit - All Other Expenses

This is the final profit after paying all costs. This is sometimes called "the bottom line" because it appears at the bottom of the statement.

Who Uses Income Statements?

Many different people look at income statements:
• Business owners use them to make decisions about their company
• Banks use them when a business wants to borrow money
• HM Revenue and Customs (HMRC) uses them to calculate tax
• Investors use them to decide if they want to buy shares in a company

Why is it Important?

The income statement helps business owners understand if their company is successful. It shows which months or years were good and which were difficult. By comparing income statements from different periods, owners can see if their business is growing.

Most UK businesses prepare an income statement every year. Some larger companies prepare them every three months (quarterly). By law, limited companies in the UK must send their accounts to Companies House each year.

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Questions
1. What is another name for an income statement in the UK?
2. What are the three main parts of an income statement?
3. If a business has revenue of £8,000 and expenses of £6,000, did it make a profit or a loss?
4. How much profit or loss did the business in question 3 make?
5. Why do banks look at income statements?
6. What is the difference between gross profit and net profit?
7. Name two types of operating expenses.
8. Where must UK limited companies send their accounts each year?
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Answers
1. Profit and loss account (or P&L).
2. Revenue (or Sales), Expenses (or Costs), and Profit (or Loss).
3. It made a profit.
4. It made a profit of £2,000 (£8,000 - £6,000 = £2,000).
5. Banks look at income statements when a business wants to borrow money / to decide whether to lend money to a business.
6. Gross profit is revenue minus cost of sales. Net profit is gross profit minus all other expenses (the final profit after paying all costs).
7. Any two of: rent, wages, insurance, advertising.
8. Companies House.