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Income Statement: Accounting Study Notes
October 11, 2026
📊 Income Statement (Profit and Loss Account)
Main Topics Covered
- What an income statement is, its purpose, and how it differs from the balance sheet
- Single-step versus multi-step preparation
- Usefulness and limitations of income statement information
- A worked example statement (GreenHarbor LLC)
- Standards and the operating section: revenue, expenses, COGS, SG&A, depreciation, R&D
- The non-operating section: other gains and losses, finance costs, income tax expense
- Irregular items: discontinued operations, accounting policy changes, extraordinary items
- Required disclosures
- Earnings per share (basic and diluted)
- IFRS requirements: statement of comprehensive income (IAS 1)
💡 What Is an Income Statement?
An income statement (also called a profit and loss (P&L) account) is one of the financial statements of a company. It shows the company's revenues and expenses during a particular period.
- It indicates how revenues (also known as the "top line") are transformed into net income or net profit (the result after all revenues and expenses have been accounted for).
- Its purpose is to show managers and investors whether the company made money (profit) or lost money (loss) during the period being reported.
Period versus point in time
| Statement | Represents |
|---|---|
| Income statement | A period of time |
| Cash flow statement | A period of time |
| Balance sheet | A single moment in time |
Charitable organizations
Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects:
- Funding sources compared against program expenses
- Administrative costs
- Other operating commitments
This statement is commonly called the statement of activities. Revenues and expenses in it are further categorized by the donor restrictions on the funds received and expended.
🧮 Two Methods of Preparation
| Method | How it works |
|---|---|
| Single-step income statement | Totals revenues and subtracts expenses to find the bottom line |
| Multi-step income statement | Takes several steps to find the bottom line |
The multi-step sequence
- Start with the gross profit.
- Calculate operating expenses.
- Deduct operating expenses from gross profit to yield income from operations.
- Add the difference of other revenues and other expenses to income from operations. This yields income before taxes.
- Deduct taxes, which finally produces the net income for the period measured.
⚖️ Usefulness and Limitations
Usefulness
Income statements may help investors and creditors to:
- Determine the past financial performance of the enterprise
- Predict future performance
- Assess the capability of generating future cash flows, using the report of income and expenses
Limitations
Information in an income statement has several limitations:
- Items that might be relevant but cannot be reliably measured are not reported (e.g., brand recognition and loyalty).
- Some numbers depend on the accounting methods used (e.g., using FIFO or LIFO accounting to measure inventory level).
- Some numbers depend on judgments and estimates (e.g., depreciation expense depends on estimated useful life and salvage value).
🧾 Example: Income Statement of GreenHarbor LLC
For the year ended December 31, 2010 (amounts in €)
Revenues
| Item | Amount (€) |
|---|---|
| Gross revenues (including interest income) | 296,397 |
Expenses
| Expense | Amount (€) |
|---|---|
| Advertising | 6,300 |
| Bank & credit card fees | 144 |
| Bookkeeping | 2,350 |
| Subcontractors | 88,000 |
| Entertainment | 5,550 |
| Insurance | 750 |
| Legal & professional services | 1,575 |
| Licenses | 632 |
| Printing, postage & stationery | 320 |
| Rent | 13,000 |
| Materials | 74,400 |
| Telephone | 1,000 |
| Utilities | 1,494 |
| Total expenses | (195,515) |
Net income: 100,882
This is a single-step style layout: total revenues of 296,397 less total expenses of 195,515 gives net income of 100,882.
📚 Standards and Account Naming
- Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board (IASB) and numerous country-specific organizations, for example the FASB in the U.S.
- Names and usage of different accounts in the income statement depend on the type of organization, industry practices, and the requirements of different jurisdictions.
- If applicable to the business, summary values for the following items should be included in the income statement.
🏭 Operating Section
| Term | Definition |
|---|---|
| Revenue | Cash inflows or other enhancements of assets (including accounts receivable) of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations. Usually presented as sales minus sales discounts, returns, and allowances. Every time a business sells a product or performs a service, it obtains revenue. Often called gross revenue or sales revenue. |
| Expenses | Cash outflows or other using-up of assets or incurrence of liabilities (including accounts payable) during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations. |
| Cost of goods sold (COGS) / cost of sales | The direct costs attributable to goods produced and sold by a business (manufacturing or merchandising). Includes material costs, direct labour, and overhead costs (as in absorption costing). Excludes operating costs (period costs) such as selling, administrative, advertising or R&D. |
| Selling, general and administrative expenses (SG&A or SGA) | Consist of the combined payroll costs. Usually understood as a major portion of non-production related costs, in contrast to production costs such as direct labour. |
| Depreciation / amortisation | The charge with respect to fixed assets / intangible assets that have been capitalised on the balance sheet for a specific (accounting) period. It is a systematic and rational allocation of cost rather than the recognition of market value decrement. |
| Research & development (R&D) expenses | Expenses included in research and development. |
Components of SG&A
- Selling expenses: expenses needed to sell products
- Salaries of sales people
- Commissions and travel expenses
- Advertising
- Freight and shipping
- Depreciation of sales store buildings and equipment
- General and administrative (G&A) expenses: expenses to manage the business
- Salaries of officers / executives
- Legal and professional fees
- Utilities
- Insurance
- Depreciation of office building and equipment
- Office rents
- Office supplies
Analysing expenses (IAS 1.99, 1.104)
Expenses recognised in the income statement should be analysed either:
- By nature: raw materials, transport costs, staffing costs, depreciation, employee benefits, etc.
- By function: cost of sales, selling, administrative, etc.
If an entity categorises by function, additional information on the nature of expenses must be disclosed, at least depreciation, amortisation and employee benefits expense (IAS 1.104).
Operating expenses
The major expenses, exclusive of cost of goods sold, are classified as operating expenses. They represent the resources expended, except for inventory purchases, in generating the revenue for the period. Expenses are often divided into two broad subclassifications: selling expenses and administrative expenses.
🌐 Non-Operating Section
| Item | Meaning |
|---|---|
| Other revenues or gains | Revenues and gains from other than primary business activities (e.g., rent, income from patents, goodwill). Also includes gains that are either unusual or infrequent, but not both (e.g., gain from sale of securities or gain from disposal of fixed assets). |
| Other expenses or losses | Expenses or losses not related to primary business operations (e.g., foreign exchange loss). |
| Finance costs | Costs of borrowing from various creditors (e.g., interest expenses, bank charges). |
| Income tax expense | Sum of the tax payable to tax authorities in the current reporting period (current tax liabilities / tax payable) and the amount of deferred tax liabilities (or assets). |
⚠️ Irregular Items
- They are reported separately because this way users can better predict future cash flows: irregular items most likely will not recur.
- They are reported net of taxes.
Discontinued operations
- The most common type of irregular item.
- Must be shown separately.
- The following do not qualify as discontinued operations: shifting business location(s), stopping production temporarily, or changes due to technological improvement.
Cumulative effect of changes in accounting policies (principles)
- The difference between the book value of the affected assets (or liabilities) under the old policy and what the book value would have been if the new principle had been applied in prior periods.
- Example: valuation of inventories using LIFO instead of the weighted average method.
- Changes are applied retrospectively and shown as adjustments to the beginning balance of affected components in equity.
- All comparative financial statements should be restated (IAS 8).
Changes in estimates
- Example: estimated useful life of a fixed asset.
- These only require prospective changes (IAS 8).
Extraordinary items
- No items may be presented as extraordinary items under IFRS, or (as of ASU No. 2015-01) under US GAAP.
- Extraordinary items are both unusual (abnormal) and infrequent, for example an unexpected natural disaster, expropriation, or prohibitions under new regulations.
- Note: a natural disaster might not qualify depending on location. For example, frost damage would not qualify in Canada but would in the tropics.
Additional items
Additional items may be needed to fairly present the entity's results of operations (IAS 1.85).
📝 Disclosures
Certain items must be disclosed separately in the notes (or the statement of comprehensive income), if material (IAS 1.98):
- Write-downs of inventories to net realisable value, or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs
- Restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
- Disposals of items of property, plant and equipment
- Disposals of investments
- Discontinued operations
- Litigation settlements
- Other reversals of provisions
📈 Earnings per Share (EPS)
Because of its importance, earnings per share (EPS) is required to be disclosed on the face of the income statement. A company which reports any of the irregular items must also report EPS for these items, either in the statement or in the notes.
Two forms of EPS
| Form | Weighted average of shares outstanding | Effect |
|---|---|---|
| Basic | Includes only actual stocks outstanding | |
| Diluted | Calculated as if all stock options, warrants, convertible bonds, and other securities that could be transformed into shares are transformed | Increases the number of shares, so EPS decreases |
Diluted EPS is considered to be a more reliable way to measure EPS.
🔍 Sample Income Statements
The source provides a very brief example prepared in accordance with IFRS. It does not show all possible kinds of accounts, but it shows the most usual ones. Differences between IFRS and US GAAP would affect the interpretation of the sample income statements.
The samples cover:
- Fitness Equipment Limited (IFRS)
- Dexterity Inc. and Subsidiaries (US GAAP)
- An interpretation comparison (IFRS vs. US GAAP)
🏛️ Requirements of IFRS
On 6 September 2007, the IASB issued a revised IAS 1: Presentation of Financial Statements, effective for annual periods beginning on or after 1 January 2009.
What an IFRS entity must include
A business entity adopting IFRS must include either:
- A statement of comprehensive income, or
- Two separate statements:
- An income statement displaying components of profit or loss, and
- A statement of comprehensive income that begins with profit or loss (the bottom line of the income statement) and displays the items of other comprehensive income for the reporting period (IAS 1.81)
Comprehensive income rules
- All non-owner changes in equity (i.e., comprehensive income) shall be presented either in the statement of comprehensive income or in a separate income statement plus a statement of comprehensive income.
- Components of comprehensive income may not be presented in the statement of changes in equity.
- Comprehensive income for a period includes profit or loss (net income) for that period and other comprehensive income recognised in that period.
- All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise (IAS 1.88).
- Some IFRSs require or permit some components to be excluded from profit or loss and instead included in other comprehensive income (IAS 1.89).
Items the statement of comprehensive income should include (IAS 1.82)
- Revenue
- Finance costs (including interest expenses)
- Share of the profit or loss of associates and joint ventures accounted for using the equity method
- Tax expense
- A single amount comprising the total of (1) the post-tax profit or loss of discontinued operations and (2) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation
- Profit or loss
- Each component of other comprehensive income classified by nature
- Share of the other comprehensive income of associates and joint ventures accounted for using the equity method
- Total comprehensive income
Allocations to be disclosed for the period (IAS 1.83)
- Profit or loss for the period attributable to non-controlling interests and owners of the parent
- Total comprehensive income attributable to non-controlling interests and owners of the parent
No items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as extraordinary items.