Learning finance is like learning a new language and the more comfortable you are with the language the easier you will find the concepts. Unfortunately, several terms are often used to describe the same item. So let’s begin with some alternatives. The income statement is also known as: profit and loss or P&L, operating statement or statement of operations, statement of earnings or earnings statement. Although the plethora of terms is unfortunate, at least they are fairly descriptive and shouldn’t cause too much confusion.
Usually an organisation will produce an income statement for each part of its business. Internally, you will hear managers refer to profit centres and an income statement may be prepared for each of these. Large organisations will produce income statements for each of their divisions. When these are added together to show the total picture, you may see the word “Consolidated” preceding Income Statement. The Income Statement or Profit & Loss (P&L) account is a summary of how the business has traded over a period of time. It’s basic format is:
trading profit = sales less cost of sales less operating expenses
Here is an example of an income statement:
In the coming topics, we will work our way through each line of the income statement.