UNIT 8:PROCESS THE INCOME STATEMENT
Key Unit competence: Process and present the income statement.
Introductory activity
The following information was extracted from the books of accounts of
Nelly relating to the financial year ended December 31st, 2022:
1. Which financial statement to be used in order to get the business
financial performance?
2. Which formula used to get the financial performance of a business?
8.1. Formulas of income statement
Learning Activity 8.1
1. What is meant by income statement?
2. State the formula to calculate gross profit in income statement
3. How is net profit calculated?
ICT in Accounting | Student Book | Senior Five
8.1.1. Meaning of income statement
Income statement is a financial statement prepared to provide information
about financial performance of a business. It shows a company’s revenues,
expenses and profitability over a period of time.
It is also sometimes called a profit-and-loss (P&L) statement. It shows your
revenue from selling products or services, expenses to generate the revenue
and manage your business. In other words, it compares all the incomes and
expenses of the period to get the profit or loss for the period.
8.1.2 Sections of the income statement
a. The trading account
The trading account is the part of income statement that summarizes the
trading activities (sale and purchase of goods/stocks) of the business and tries
to determine the gross profit for the relevant financial period. Gross profit
equals net sales (sales minus sales returns) minus the cost of goods sold.
The gross profit is then taken up in the second part of income statement, the
profit and loss account as part of the income.
b. The profit and loss account
The profit and loss account shows the net profit or net loss that the business
has made from all the activities during a financial period. The net profit (or
loss) is determined by deducting all the expenses from all the incomes of the
same financial period.
Income statement contains at least two major sections: revenues and expenses.
– Revenues are inflows of assets from providing goods and services to
customers. Newton’s income statement contains one type of revenue:
sales to customers. This includes sales made for cash and sales made
on credit.
– Expenses are the costs incurred to generate revenues such as salaries,
rent, insurance, transport, water and electricity and other items.
The income statement has two parts: The first part (previously known as
trading account) shows the gross profit. The second part (previously known
as the profit and loss account) shows the net profit for the period.
8.1.3. Formats of income statement
There are two formats of preparing the income statement, the Horizontal or
T-account format and the Vertical or narrative format.
ICT in Accounting | Student Book | Senior Five
A. Horizontal format or conventional format Income statement
Name of the business
Income statement for the year ended …../……/…….
B. Vertical format
Name of the business:………………………
Income statement for the year ended: date/month/year
ICT in Accounting | Student Book | Senior Five
Note: The use of brackets on the amounts means deduction of the amount. The
other option would be to use the word ‘Less’ before the item concerned.
Application activity 8.1
1. Give the two main sections of income statement
2. What is the formula to calculate cost of goods sold?
3. How is net profit calculated in income statement?
ICT in Accounting | Student Book | Senior Five
8.2. Configuration of income statement
Learning Activity 8.2
Mr MBOGO is an accountant at Vision Company and uses computerized
accounting software in his day to day business transactions records. He
has entered all the transactions in a SAGE line accounting file in the year
2022. However, when he wants to present the income statement to see if
the business has made profit or loss, the income statement is not displaying
the results because it is not yet configured.
1. Basing on the steps followed, guide him how to make income
statement configuration.
2. What is the importance of configuring income statement?
Learning Activity 8.2
In sage line 100, once the journal entries were made, trial balance, accounts
ledger, income statement and balance sheet are done automatically. However,
for the income statement and balance sheet, the user needs to make some
configurations in order to customize the company’s transactions with the
software.
The following are steps taken to open income statements
Step 1. Click on stat(statement)menu on menu bar
Step 2. Click on BS/Income statement
ICT in Accounting | Student Book | Senior Five
In (1), click on stat, and then click on BS/Income statement (2)
Step 3. Remove ticks on details of account, on print BS and on print int. balances.
Only print income statement option must have a tick.
Figure. 8.3. Selection of income statement print preview
Step 5: Remove a tick on day book quality, print preview and
print once per document, leave a tick on “Print preview” only. After, click Ok
Figure 8. 4: Income statement print preview before configuration
Income statement appears to be in French because it originates from French company
and the balances are not found, hence need to be configured
In order to get to the configuration of income statement, instead of clicking Ok,
click on BS/Income statement user defined icon
ICT in Accounting | Student Book | Senior Five
Figure 8. 5: Path to Income statement configuration
Application activity 8.2
1. Why is it necessary to make income statement configuration in Sage
line 100?
2. Outline the steps followed when configuring income statement?
8.3. Creation of elements of income statement
Learning Activity 8.3
1. What are the elements of income statements?
2. Give three examples of expenses a business can have
3. What is the formula to calculate gross profit?
8.3.1. Net sales
Net sales refer to the total amount of sales made by a business within a specific
period after sales returns, discounts, and sales allowances are deducted. Net
sales may be referred to as “net revenue” or simply “sales” when listed on an
income statement. In income statement, net sales are obtained by deducting
sales returns from total sales incurred by the business, i.e net sales=Sales-sales
returns
ICT in Accounting | Student Book | Senior Five
ICT in Accounting | Student Book | Senior Five
In (2), in the name field, type sales for the sales account and sales returns or returns
outwards
In (3), select both for each account of them when configuring and in (4)Press ENTER button on keyboard to save the configuration of an account. When saved, it
moves up and leaves space for the configuration of another account.
8.3.2. Cost of goods sold
Cost of goods sold is the total of all costs used to create a product or service,
which has been sold. These costs fall into the general sub-categories of direct
labor, materials, and overhead. Direct labor and direct materials are variable
costs, while overhead is comprised of fixed costs (such as utilities, rent, and
supervisory salaries). In a service business, the cost of goods sold is considered
to be the labor, payroll taxes, and benefits of those people who generate billable
hours (though the term may be changed to “cost of services”). In a retail or
wholesale business, the cost of goods sold is likely to be merchandise that
was bought from a manufacturer. It does not include any general, selling, or
administrative costs of running a business.
Normally, cost of goods sold is calculated by this formula: Beginning inventory
(opening stock) + Purchases (minus purchase returns) - Ending inventory =
Cost of goods sold
In sage line 100 income statement configuration, cost of goods sold is created
as header and will be created as follow:
ICT in Accounting | Student Book | Senior Five
The elements of cost of goods sold are created as header type. In sage line 100
it is difficult to determine opening stock, since no option of entering opening
balance like it is in Sage line 50, QuickBooks and some other accounting
software. Therefore, cost of goods sold will be equal to net purchases minus
ending inventory (closing stock). If no closing stock is found, cost of goods sold
will be equal to purchases minus purchases returns.
In sage line 100, the configuration of purchase and purchase returns will be
looking as follow:
Figure 8. 9: Purchases and purchases returns configuration
8.3.3. Gross profit
The balance of profit, which is arrived at by matching sales proceeds with the
actual cost of the goods sold, is called gross profit. The gross profit of a company
is the total sales of the firm minus the total cost of the goods sold. The total
sales are all the goods sold by the company. The total cost of the goods sold is
the sum of all the variable costs involved in sales.Gross profit is configured as subtotal in income statement configuration
ICT in Accounting | Student Book | Senior Five
Figure 8.10: Gross profit configuration
8.3.4. Other incomes
The term income refers to earnings of the business over a given period. Examples of
incomes a business may receive include rent received, commission received, interest receivable, discount received and others. For example, if we have rent income, it
may be created as follow
Figure 8. 11: Income configuration
ICT in Accounting | Student Book | Senior Five
The total of incomes earned by the business added to gross profit is called grossincome and is given a total type
Figure 8. 12: Gross income configuration
8.3.5. Expenses
In accounting terms, expense is the operational cost that is paid to earn business
revenues. It means the outflow of cash in return for goods or services. Expenses
can also be written as the sum of all the operations that usually bring profit.
Examples of the expenses include rent expenses, wages and salaries, transport,
utilities, maintenance, office supplies, depreciation and insurance, telephone
costs and stationery.
The expenses take the type of header while specific expenses take the balancelimit type.
Figure 8. 13: Expenses configuration
ICT in Accounting | Student Book | Senior Five
A particular account of expense is of balance limit type. After setting balance
limit type, select both and press Enter button on key board to save that particular
expense account. For example, if we configure transport expense, the output isas follow:
Figure 8. 14: Particular expense type configuration
8.3.5. Net profit
Net profit is the amount of money your business earns after deducting all
operating, interest, and tax expenses over a given period of time. To arrive at
this value, you need to know a company’s gross profit. If the value of net profit
is negative, then it is called net loss.
To configure the net profit in income statement configuration, the same
procedure is to be followed as the configuration of other accounts configured
before. The only difference is that the net profit is saved as total type. It willtherefore be configured as follow:
ICT in Accounting | Student Book | Senior Five
Figure 8. 15: Net profit configuration
Application activity 8.3
1. What are the elements of income statement?
2. Write down the steps that may be follow to make configuration ofgross profit in income statement
8.4. Presentation and interpretation of income statement
Learning Activity 8.4
From the following transactions, make journal entries and prepare the
balance sheet and income statement and show their configurations.
1st January, started a business with 9,000,000FRW cash in hand
2nd, January bought machinery for 2000,000 FRW by cash
4th January, bought goods worth 80,000 FRW from Suzan on credit6th January, received a loan of 3000,000 FRW
ICT in Accounting | Student Book | Senior Five
10th January, credit purchase from Habimana for 40,000FRW
13th January, bought building for 2,500,000 FRW by cheque
15th January, credit purchase from Gahungu, for 50,000 FRW
20th January, Credit sales to Mahoro for 90,000 FRW,
5th February, withdrew business cash of 200,000 FRW for personal use
10th February, credit purchase from Ayinka for 70000 FRW
11th February, returned goods of 30000 FRW to Ayinka
15th February, bought land for 1,500,000 FRW by cash
20th February, bought goods of 300,000 FRW on credit from John Enterprise
6th March, credit sales to Jimmy for 200,000 FRW,
7th March, Jimmy returned goods costing 40,000 FRW
12th March, sold goods to TOM for 190,000 FRW on credit
10th April, Paid transport of 50,000 by cash
12th April, Rent paid for 80,000 FRW by cheque
3rd May, Bought equipment for 1000,000 FRW cash
4th May, commission valuing at 60,000 FRW was received
10th May, Rent worth 120,000FRW was received by cheque
31st May, recorded depreciation of fixed assets for 90,000 FRW
Additional information:
File name: AFRICA
Operating period: 2023
Company name: TWITEZIMBERE Ltd Company
Activity: Manufacturing
After creating chart of account for the affected accounts, S/P chart and journal
codes, and recording related transactions as required, the next step is to makeconfigurations as required
ICT in Accounting | Student Book | Senior Five
The chart of account will look like this:
Figure 8. 16: Chart of account worked example
S/P chart for the third parties will be as follow:
Figure 8. 17: SP chart worked example
ICT in Accounting | Student Book | Senior Five
After creating third party account, the next step is to create journal codes. Thecreated journal codes are presented below:
Figure 8. 18: Journal codes worked example
After creating the required chart of account, the next step is recording
transactions in different journals depending on the type and nature of the
accounts affected by the transaction and the month in which the transaction has
taken place. Moreover, the journal entries may be made in the general journal.After journal entries were made the trial balance is presented as follow:
ICT in Accounting | Student Book | Senior Five
Figure 8. 19: Trial balance worked example presentation
After the presentation of trial balance, the next step is the configuration of
income statement, which is done by following the steps below:
Step 1: Click on Stat-B/S income statement
Step 2. Remove a tick from detail of account, Print BS, and on print interimbalances. Only tick on Print income statement. Then click on BS/IS user defined.
ICT in Accounting | Student Book | Senior Five
Figure 8. 20: Path to income statement configuration
Step 3. Right click and select all-Right click and delete selected elements or
click on delete icon on navigation toolbar. At this step, it is now possible to startthe real configuration.
Figure 8.21: Deleting unconfigured income statement elements
ICT in Accounting | Student Book | Senior Five
Step 4. After all elements have been deleted, the user can start real configuration byRight click-Add new element, and the following window appears:
Figure 8. 22: Income statement blank window for configuration
In header field, click to add the accounts of income statement and their headings.
For the header, type the title of each section or part of the income statement
which is to be calculated like net sales, cost of goods sold, other incomes and
expenses.
For balance limit and transaction limit, use the accounts created in chart of
account that appear in income statement and for which entries have been done.
Make gross profit as sub-total and the net profit as total. For example, salesaccount may be created as follow:
Figure 8. 23: Sales account configuration
ICT in Accounting | Student Book | Senior Five
• In the type field, we have selected balance limit for sales account,
• In the name field we have type the name of account we want to make
configuration for. In our case it is sales account.
• In the code field, the use may use any code of the choice. It can be numeric
or character. Leaving the field empty does not affect your work at all.
• In both, the user can either select both, debit or credit, depending on
whether an account can have debit balance or credit balance.
• Click on the field in the left side of both field, to find out the chart of
account created and select the account to be configured. Then the account
number of the selected account is displayed and tap ENTER button on
keyboard.
For example, net sales must be header type while gross profit will be subtotal
type.
Figure 8.24: Net sales and gross profit configuration
Follow the same procedure for all accounts that appear in income statement.
After they were all configured, the user arranges them following vertical formatof income statement by using shift up and shift down buttons.
ICT in Accounting | Student Book | Senior Five
Figure 8. 25: Use of shift up and shift down tabs to arrange accounts
Only net profit will be of type total and will be created as follow:
ICT in Accounting | Student Book | Senior Five
Figure 8.27: configured income statement accounts organized in vertical format
After configuring and arranging the accounts of income statement, the user can
now view and present income statement results
, by clicking on the stat menu SB/income statement
- Tick on income statement only and click Ok. The resultsbelow will therefore be presented:
ICT in Accounting | Student Book | Senior Five
Figure 8.28: Presentation of income statement results
According to the above results, it is clear that the company has made a net profit
of 50,000 FRW that resulted from net sales of 600,000 FRW minus cost of
goods sold of 510,000 FRW which gave the gross profit of 90,000 FRW. Other
income totaled 180,000FRW and when added to gross profit, we obtained a
gross income of 270,000 FRW. To obtain net profit, the total expenses of 220,
000 FRW were deducted from the gross income and the net profit of 50000
FRW was obtained. This will be transferred to balance sheet to increase thecapital and owner’s equity in general.
ICT in Accounting | Student Book | Senior Five
1. What is meant by income statement?
2. Differentiate between gross profit and net profit
3. What is the formula to calculate cost of goods sold?
4. The following list of accounts for ABC Company Ltd. is available at
the end of 2022. You are required to prepare income statement
Advertising expenses 15,000 FRW
Beginning inventory 80000 FRW
Sales 2,500,000 FRW
Sales returns 150000 FRW
Discount for volume of sale 150,000 FRW
Insurance expense 14,500 FRW
Intangible assets depreciation expense 10,800 FRW
Purchases for goods for sale 1,500,000 FRW
Purchases returns of goods for sale 60,000 FRW
Rent revenue 80, 0000 FRW
Ending inventory 500,000 FRW
Commissions received 60000 FRWWages and salaries 300,000 FRW