Management Accountancy : Income Statement (Profit & Loss Account)

The income statement is used to measure the profit that the business has generated over a period.  It is broken up into the following groups/sections:-

Gross Profit

This takes into account the direct costs and incomes to derive a basic profit in a business, by comparing the income (sales revenue) against the cost of sales (opening inventories, purchases and closing inventories).

Cost of sales = (Opening Inventories + Purchases) – Closing Inventories

Operating Profit

Operating profit takes gross profit and makes additional deductions to it to factor in the cost of indirect costs (i.e. salaries, rent, heating/lighting, communications, vehicles, depreciation).  

Profit for the year (Net)

This is the figure that will be added to equity on the Balance Sheet, and is the operating profit less any interest payments made.