Section B2: Income Statement
Introduction
The Income Statement shows your operating profit or loss over a specific period of time.
For your business plan, you should forecast your income and expenses over a 12 month period. (This method of recording revenues at the time they occur rather than at the time they are received is called accrual. It gives you a more accurate picture of the business=s financial position than recording revenues at the time they are received – entitled cash method.)
Factors Affecting Income
Your operating profit or loss depends on:
- Revenue: Generally, revenue includes sales; that is, the price of goods sold or services rendered to your customers. Revenues should be recorded at the time they occur, not when payment is received from the customer.
- Cost of Sales: Cost of Sales includes costs for material purchases for resale.
- Gross Profit: Gross profit is the profit from sales minus the cost you paid for the goods sold. i.e. when you sell goods for $100 that you paid $60 for you make a gross profit of $40.
- Expenses
Expenses include any costs incurred in the process of earning revenue. For example, advertising, rent, utilities, and insurance can be considered expenses.
Expenses should be recorded in your accounting records at the time they are incurred, not when they are paid. (This method of recording expenses at the time they occur rather than at the time they are paid is called accrual. It gives you a more accurate picture of the business=s financial position than recording expenses at the time they are received – entitled cash method.)
See Section B7 for a list of allowable business expenses.
Calculation of Net Income or Loss
The net income or loss is calculated by subtracting expenses from gross profit.
Projected Income Statement
The Projected Income Statement for Fay’s Variety is shown on the next page to give you an idea of what you should be including in your Projected Income Statement.
| FAY’S VARIETY STORE PROJECTED INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 2013 |
||
| REVENUE | ||
| Sales | $112,000 | |
| COST OF SALES | ||
| Material Purchases | 56,500 | |
| GROSS PROFIT | 55,500 | |
| EXPENSES | ||
| Insurance | 1,000 | |
| Licences & Taxes | 1,000 | |
| Office Supplies & Postage | 1,500 | |
| Professional Fees | 400 | |
| Rent | 7,200 | |
| Repairs & Maintenance | 1,200 | |
| Telephone | 800 | |
| Utilities | 4,800 | |
| Vehicle Expenses | 2,400 | |
| Wages & Benefits | 15,000 | |
| TOTAL EXPENSES | 35,300 | |
| NET INCOME FOR THE YEAR | $20,200 | |
Notes:
- $1,000 sale on account (account receivable) is not reflected in cash sales on Cash Flow because cash will not be received until after month 12.
- Owner’s Drawings are not reflected in the income statement, they are recorded in the Equity section of the Balance Sheet.
Click on Worksheet 6.7 (Excel) to prepare an Income Statement for your business.