The Income Statement

Summarise a period's income and expenses to show profit or loss.

In this lesson you will

Prepare an income statement
Calculate gross and net profit and margins

Key concepts

revenuecost of goods soldgross profitnet profit

The lesson

An income statement (profit and loss) shows revenue, minus cost of goods sold to give gross profit, minus operating expenses to give net profit.

Margins compare profit with revenue: gross margin = gross profit ÷ revenue; net margin = net profit ÷ revenue.

Compare with previous months and the budget to see whether performance is improving.

Step by step

Total revenue and cost of goods sold.
Calculate gross profit.
List and total operating expenses.
Calculate net profit and margins.

Worked calculation

A month's income statement

From revenue to net profit, with gross and net margins.

A shop's income statement for March, SSP (illustrative)
Item	Working	Amount
Revenue	sales for the month	2,400,000
Cost of goods sold	cost of the stock sold	(1,440,000)
Gross profit	2,400,000 − 1,440,000	960,000
Operating expenses	rent 300,000 + salaries 420,000 + transport 60,000 + utilities 45,000	(825,000)
Net profit	960,000 − 825,000	135,000

Explanation

Gross margin is 960,000 ÷ 2,400,000 = 40%: for every 100 SSP of sales, 40 SSP remains after the cost of the goods.

Net margin is 135,000 ÷ 2,400,000 = 5.6%. Operating expenses use up most of the gross profit, so small changes in costs have a big effect on net profit.

Check your understanding

1,440,000 + 825,000 + 135,000 = 2,400,000.

Practice activity

Prepare the month's income statement.

Expected result: A correctly formatted income statement with margins.

Check your understanding

How is gross profit calculated?

Show answer
Revenue − cost of goods sold.
How is net margin calculated?

Show answer
Net profit ÷ revenue.

Taught live by an instructor — online or in person. Free course lessons are for self-study and do not lead to a certificate — see registration options.