Financing and Marketing Management

Unit 6 - Basic Accounting Procedures or Analysis of Business Performance

6.2. The Income Statement / Profit and Loss Account
The income statement / profit and loss account measures the sales made and the costs incurred in a business over a particular time period. For external reporting this is usually for a year but internally most businesses will prepare their income statement / profit and loss account on a a monthly or quarterly basis. The income statement / profit and loss account captures a sale when the product or service is delivered to the customer. Cash may or may not change hands at this stage.
Costs are recorded in the income statement / profit and loss account to reflect the costs of making the sales during that time period. All costs incurred in running a business are included in a income statement. But capital investment are not included. However, depreciation and other fixed costs are included. This is called the matching or accruals concept. This concept states that the costs recorded must match to the sales made in the relevant time period. Although the jargon in an income statement / profit and loss account may vary (especially from country to country) the costs are always deducted from sales in order of how closely they relate to the sale itself. The order that cost deduction appears is therefore:

• Cost of product sold
• Sales, general and administration costs
• Interest expense
• Tax expense

After costs are deducted from sales, we are left with the bottom line profit (also known as the net income or profit after tax) which belongs to the shareholders, and consequently is reflected as part of shareholders’ equity on the balance sheet.