High in this session, we will discuss the income statement, it's a really exciting topic, and I really
hope that you will enjoy it.
Before we talk about the statement itself, let's ask ourselves, what is the objective of any business?
Now, if you think of any business in the world, you will notice that the business is there to produce
a product or service, sell it and make profit.
So if you think of a dry cleaner.
It all means to send you the service of cleaning your clothes.
So sell that service to you, hopefully try to make some profits now in order to produce or make or
provide any good or service, any business will have to incur some expenses.
So the dry cleaner, for example, he or she will have to rent a shop.
So they will pay for some rent.
They may have to hire people to help them.
So they would pay salaries.
They have to pay for electricity and utility bills and so on and so forth.
So in order to be able to produce or provide a goods or service, you must incur some expenses.
And once you prepare these services and goods, you going to sell them.
So selling them will generate some revenue to you.
So there is a report in business called the Income Statement.
And in that report, the business will summarises its revenue and expenses for a period of time.
Now, usually this is prepared at the end of each month.
So for most of these businesses, at the end of the month, they will prepare the income statement.
And in that statement, it will show how much revenue they earn throughout the month.
What was the expenses throughout the month?
And this is the income statement.
Let's take this example of a simple business model where we have a drink that now, if we learned this,
a few details about the business and you can see the business model is to buy the cans of drink from
a supplier, maybe make them cold and nice to drink and offer them directly to the people walking past
the area.
So these are some numbers related to that business.
Now, if we take one month, which is, for example, January, and we try to figure out how much profit
did the business make, and to do that, we need to prepare what we call the income statement.
Remember when we learned last session about the purpose of accounting?
We said the first question to answer accounting is how much profit did the business make?
And this is where the income statement comes in.
So let's see what revenue we made.
So remember, profit is the difference between revenue and expense.
So if you're looking at the profit for any business, you need to calculate the revenue, calculate
the expense and see the difference between the two.
And in this case, we said Jackson two thousand five hundred counts.
We know that each car is sold for three pound.
So in total revenue, he made seven thousand five hundred bound in January.
Now, what expenses did he end up?
Now the cost of the accounts he sold, the cost of sales, the cost of goods sold, all different names
for the same thing will be two thousand five hundred because we know each count he buys from the supplier
for one pound.
Now he paid obviously all these other expenses total expense for the month of January three thousand
eight hundred sixty.
So if the revenue was seven thousand five hundred on the total expenses, three thousand eight hundred
and sixty, that means the business made a profit of three thousand six hundred and forty.
Now it's important to look at some different types of profits.
The first one, what we call the gross profit, and sometimes we call this the first level of profit.
And here we only look at the difference between revenue and the cost of sale.
So we ignore the other expenses.
We try to look at.
How much profit did the company make after taking into consideration?
Only the cost of this is called the gross profit.
In Jack example, that will be seven thousand five hundred minus two thousand five hundred and that
will be five thousand.
The second type of profit is what we call operating profit.
And here we look at the.
Revenue minus cost of sales, minus all the expenses or just simply the gross profit minus book, the
all the expenses.
So for Jack that will be three thousand six hundred and forty.
We have another definition or another time, which is the net profit.
And this is simply just the bottom line, which is the operating profit minus the taxes, and that will
give you the net profit.
Now, the income statement structure, there is a way to prepare the income statement.
So once you identify the account, you know what to include in the income statement, which is revenue,
cost of sales, then you have your gross profit expenses, operating profit, taxes, net profit.
This is the structure you need to follow and clearly you need to adhere to these details.
So you always start with the business name.
So Jack drinks in this example, we write the name of the statement.
So that's income statement for and you write what period?
And then you just write these details.
Remember the income statement?
It's more like a video, more like a recording.
So we recording the transactions for each of these accounts throughout the period.
So if we look, for example, of the cost of sale and its two thousand five hundred, that means during
the month of January, the accumulated value of all the financial transactions impacting the cost of
sin was two thousand five hundred.
So this is all you need to know above the income statement.
You should now know what accounts to include in the income statement, why we prepared it and what is
the structure of the income statement.
I hope you enjoyed this lecture and I look forward to see you in the next one.
Thank you very much.