After completing the preparation of the modified trial balance, which contains all the balances of the accounts after the adjustment, the financial statements of the establishment are then prepared, so that the balances of the revenue and expense accounts are transferred to prepare the income statement and extract the income result from profit or loss, and transfer the balances of the property rights accounts and the income result account To prepare a list of changes in property rights, and to transfer the balances of the assets and liabilities accounts to prepare the statement of financial position (balance sheet).
income list
It is a list that is prepared to find out the result of the business’s work in terms of profit or loss at the end of the financial period, and this is done by matching the revenues with the expenses and the difference between them will be either profit or loss. If the revenues exceed the expenses, the result will be profit, but if the expenses are greater than the revenues, the result will be a loss The income statement is prepared in one of two ways, either in an abbreviated way and is called the single-stage income statement, or in several stages and is called the multi-stage income statement, and the two methods give the same result.
It is a list that is prepared to find out the result of the business’s work in terms of profit or loss at the end of the financial period, and this is done by matching the revenues with the expenses and the difference between them will be either profit or loss. If the revenues exceed the expenses, the result will be profit, but if the expenses are greater than the revenues, the result will be a loss The income statement is prepared in one of two ways, either in an abbreviated way and is called the single-stage income statement, or in several stages and is called the multi-stage income statement, and the two methods give the same result.
Income statement elements and items:
Revenue (net sales)
The amounts that are collected from others or due from others as a result of providing a service to others are called service revenues, while the revenues that are realized from the sale of goods to others are called sales.
cost of sales (cost of revenue)
In the service establishment, the cost of revenue represents the expenses that were charged directly to the service and that contributed to achieving the revenue.
In the commercial establishment, it is called the cost of sales, and it represents the cost of the goods sold, which is calculated according to the inventory system used, as will be explained in the lesson of the accounting treatment of commodity operations.
In the industrial establishment, the cost of sales represents the cost of raw materials, labor and manufacturing costs.
operating expenses
They are the expenses incurred by the establishment in order to obtain the revenue, and it can be divided into administrative and general expenses such as salaries and wages, electricity and telephone expenses, etc., and selling and marketing expenses such as advertising expenses, sales expenses, and others.
Other (extraordinary) revenues and gains
These are revenues or gains that the establishment obtains as a result of operations and activities that are not related to the main activity of the company, such as the gains that come from investing the establishment in the stock market, or profits derived from the sale of fixed assets, or from renting part of its real estate.
Other expenses and losses (unusual)
They are the expenses and losses incurred by the establishment as a result of operations and activities that are not related to the main activity of the company, such as the losses resulting from the establishment's investment of its money in the stock market, and the losses resulting from the sale of fixed assets, and so on.
One-stage (abbreviated) income statement
This list is characterized by its ease of preparation and understanding of its content and simplicity, as the elements of the income statement are divided into two items, an item related to revenues, whether they are revenues arising from the main activity or other (extraordinary) revenues and gains, and another item related to expenses, whether they are operating expenses and other expenses and losses (non- Ordinary) and the difference between the sum of the two items represents the net income, whether profit or loss.
Revenue (net sales)
The amounts that are collected from others or due from others as a result of providing a service to others are called service revenues, while the revenues that are realized from the sale of goods to others are called sales.
cost of sales (cost of revenue)
In the service establishment, the cost of revenue represents the expenses that were charged directly to the service and that contributed to achieving the revenue.
In the commercial establishment, it is called the cost of sales, and it represents the cost of the goods sold, which is calculated according to the inventory system used, as will be explained in the lesson of the accounting treatment of commodity operations.
In the industrial establishment, the cost of sales represents the cost of raw materials, labor and manufacturing costs.
operating expenses
They are the expenses incurred by the establishment in order to obtain the revenue, and it can be divided into administrative and general expenses such as salaries and wages, electricity and telephone expenses, etc., and selling and marketing expenses such as advertising expenses, sales expenses, and others.
Other (extraordinary) revenues and gains
These are revenues or gains that the establishment obtains as a result of operations and activities that are not related to the main activity of the company, such as the gains that come from investing the establishment in the stock market, or profits derived from the sale of fixed assets, or from renting part of its real estate.
Other expenses and losses (unusual)
They are the expenses and losses incurred by the establishment as a result of operations and activities that are not related to the main activity of the company, such as the losses resulting from the establishment's investment of its money in the stock market, and the losses resulting from the sale of fixed assets, and so on.
One-stage (abbreviated) income statement
This list is characterized by its ease of preparation and understanding of its content and simplicity, as the elements of the income statement are divided into two items, an item related to revenues, whether they are revenues arising from the main activity or other (extraordinary) revenues and gains, and another item related to expenses, whether they are operating expenses and other expenses and losses (non- Ordinary) and the difference between the sum of the two items represents the net income, whether profit or loss.
Multi-stage income statement
This list is characterized by the fact that it gives detailed information about income, as it displays information about total income, operating income, and net income, as follows:
Total amount Partial amount statement
xxx total revenue
(xxx) (-) Cost of Revenue (Cost of Sales)
xxx
Total Income (Profit/Loss)
xxx
Total Income (Profit/Loss)
(-) Operational expenses
General and administrative expenses
Selling and marketing expenses
(xxx) Total operating expenses
xxx
net operating income (profit/loss)
xxx
net operating income (profit/loss)
xxx (+) Revenues and other earnings
(xxx) (-) Other expenses and losses
xxx
Net income before tax (profit/loss)
xxx
Net income before tax (profit/loss)
(xxx) (-) income tax
xxx
Net income after tax (profit/loss)
As you notice, the net income is reached using this method through several stages as follows:
xxx
Net income after tax (profit/loss)
As you notice, the net income is reached using this method through several stages as follows:
The first stage: extracting the total income (total profit / total loss):
The total income represents the difference between the revenue and the cost of the revenue, if any, and the result is either a total profit or a total loss.
Gross Income = Revenue - Cost of Revenue (Cost of Sales)
The second stage: extracting income from operational operations:
Income from operating operations represents the difference between total income and operating expenses
Operating Income = Total Income - Operating Expenses
The third stage: extracting the net income before tax (net profit / net loss):
After extracting net income from operating operations, other (extraordinary) revenues are added and other (extraordinary) expenses are deducted to arrive at net income before tax.
Net income before tax = income from operating operations + other revenues - other expenses
The fourth stage: extraction of net income after tax (net profit / net loss):
If the laws in the country impose an income tax on the establishment at a certain rate, then the value of the tax due is deducted from the net income of the period in order to extract the net income achieved after deducting the tax (profit or loss).
Net Income After Tax = Net Income Before Tax - Income Tax Due
Closing the revenue and expense account
The revenue account and the expense account are considered temporary accounts, and the purpose of opening them is to determine the net income of the establishment during the current financial period. Closing both accounts in the profit and loss account (income summary) to show the balance of the income summary with the difference between revenues and expenses, whose value represents the result of the business’s work during the financial period.
The total income represents the difference between the revenue and the cost of the revenue, if any, and the result is either a total profit or a total loss.
Gross Income = Revenue - Cost of Revenue (Cost of Sales)
The second stage: extracting income from operational operations:
Income from operating operations represents the difference between total income and operating expenses
Operating Income = Total Income - Operating Expenses
The third stage: extracting the net income before tax (net profit / net loss):
After extracting net income from operating operations, other (extraordinary) revenues are added and other (extraordinary) expenses are deducted to arrive at net income before tax.
Net income before tax = income from operating operations + other revenues - other expenses
The fourth stage: extraction of net income after tax (net profit / net loss):
If the laws in the country impose an income tax on the establishment at a certain rate, then the value of the tax due is deducted from the net income of the period in order to extract the net income achieved after deducting the tax (profit or loss).
Net Income After Tax = Net Income Before Tax - Income Tax Due
Closing the revenue and expense account
The revenue account and the expense account are considered temporary accounts, and the purpose of opening them is to determine the net income of the establishment during the current financial period. Closing both accounts in the profit and loss account (income summary) to show the balance of the income summary with the difference between revenues and expenses, whose value represents the result of the business’s work during the financial period.
Expense closing entry:
Debtor creditor statement
Debtor creditor statement
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