Section B2: Income Statement

Introduction

The Income Statement shows your operating profit or loss over a specific period of time.

For your business plan, you should forecast your income and expenses over a 12 month period. (This method of recording revenues at the time they occur rather than at the time they are received is called accrual. It gives you a more accurate picture of the business=s financial position than recording revenues at the time they are received – entitled cash method.)

Factors Affecting Income

Your operating profit or loss depends on:

1. Revenue

Generally, revenue includes sales; that is, the price of goods sold or services rendered to your customers.

Revenues should be recorded at the time they occur, not when payment is received from the customer.

2. Cost of Sales Cost of Sales includes costs for material purchases for resale.

3. Gross Profit

Gross profit is the profit from sales minus the cost you paid for the goods sold. i.e. when you sell goods for $100 that you paid $60 for you make a gross profit of $40.

4. Expenses

Expenses include any costs incurred in the process of earning revenue. For example, advertising, rent, utilities, and insurance can be considered expenses.

Expenses should be recorded in your accounting records at the time they are incurred, not when they are paid. (This method of recording expenses at the time they occur rather than at the time they are paid is called accrual. It gives you a more accurate picture of the business=s financial position than recording expenses at the time they are received – entitled cash method.)

See Section B7 for a list of allowable business expenses.

Calculation of Net Income or Loss

The net income or loss is calculated by subtracting expenses from gross profit.

Projected Income Statement

The Projected Income Statement for Fay’s Variety is shown on the next page to give you an idea of what you should be including in your Projected Income Statement.

FAY’S VARIETY STORE
PROJECTED INCOME STATEMENT
FOR THE YEAR ENDING DECEMBER 31, 2013
REVENUE
Sales $112,000
COST OF SALES
Material Purchases 56,500
 
GROSS PROFIT 55,500
EXPENSES
Insurance 1,000
Licences & Taxes 1,000
Office Supplies & Postage 1,500
Professional Fees 400
Rent 7,200
Repairs & Maintenance 1,200
Telephone 800
Utilities 4,800
Vehicle Expenses 2,400
Wages & Benefits 15,000
TOTAL EXPENSES 35,300
NET INCOME FOR THE YEAR $20,200

Notes:

1. $1,000 sale on account (account receivable) is not reflected in cash sales on Cash Flow because cash will not be received until after month 12.

2. Owner’s Drawings are not reflected in the income statement, they are recorded in the Equity section of the Balance Sheet.

Click on Worksheet 6.7 to prepare an Income Statement for your business.

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