Income statement

What it means

A financial statement reporting revenue less expenses to determine the profit or loss for a period.

Example

Revenue minus cost of sales gives gross profit; less other expenses gives profit for the year.

Why it matters

It answers the question 'did the business make a profit this year?'

In practice

The income statement covers a period, usually a financial year. It works down from revenue to gross profit (revenue less cost of sales) and then to profit for the year after other income and expenses. Its figures come from the income and expense balances in the trial balance, adjusted for accruals, prepayments, depreciation and any provisions.

For example, revenue of RM50,000 less cost of sales of RM30,000 gives gross profit of RM20,000. After expenses of RM12,000, profit for the year is RM8,000. This profit is then added to capital.

Students often confuse it with the statement of financial position. The income statement measures performance over a period, and its accounts are closed off at the year end. The statement of financial position shows position at a single date, and its balances are carried forward. Profit is the link between the two. It flows into capital and raises the owner's stake.

If laying out the income statement in the exam format is slow for you, one of our teachers can practise it with you until it feels routine. Book a trial class.

Related terms

• Revenue
• Expense
• Gross profit
• Statement of financial position
• Accounting cycle
• Bad debt recovered
• Financial year
• Sole trader
• Trial balance

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 5.1 Sole traders (page 15).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.