In today’s article, we are going to review the main accounts that are found on one of the financial statements prepared by the businesses, the Income statement.
The trading account category deals with the price of goods sold and expenses directly related to the sale of these goods. The price of goods sold means how much a company sold the goods for, which is reflected under the account usually called Sales Revenue. The company might have separate Revenue accounts to reflect sales revenue for different goods, departments, services, or any other categories.
Cost of Goods Sold account reflects the expenses part of the trading account category. This is an account where a company records the cost of merchandise sold or items it made (for manufacturing businesses). You might see this account further broken down into direct labor and materials as well as overhead. The trading account gives you a Gross profit amount.
Profit and Loss Account
The profit and loss account reflects the management of the business. This is overhead and management behind the scenes, not directly related to the actual product being sold. This category allows the user of the Income statement to see how well the management is taking care of things.
The profit and loss account gives you the Profit before interest and tax amount and the Net profit before tax amount. In this category, you will usually see the Selling, General and Administrative expenses, and Interest expenses. The bookkeeping accounts that fall under the first group of expenses can vary, but they typically include:
- Rent and lease expense (land, facilities)
- Wages and salaries of management and other staff
- Marketing expenses (advertising, brochures, etc.)
- Utilities (phone, electricity, gas, and other costs)
- Distribution costs
- Depreciation not related to production
- Office supplies
- Insurance payments
- Office equipment.
All these accounts are usually simply reflected as a single total amount in the Income statements. Alternatively, they can be grouped as Selling Expenses and General and Administrative Expenses.
The appropriation account shows how the profit is then distributed in the company. Part of the profit will cover the business’s obligation before the government in form of the tax payments, including income taxes. This information can be found in the Taxes account.
Another portion of it might go to the shareholders in the form of dividend payments. When it comes to the Dividends account, you might not always see it on the Income statement as companies sometimes decide to keep all of their profits in the company.
The other important Income statement account would be the Retained Earnings account. The Retained earnings (Uncovered loss) account is intended to summarize information about the presence and movement of the amounts of retained earnings or uncovered loss of the organization. The amount of Net profit of the reporting year is closed off at the end of the accounting period to the Retained earnings account.
Author: Charles Lutwidge