COMPONENTS OF THE STATEMENT OF PROFIT OR LOSS

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The statement of profit or loss is the financial statement that shows the revenue and expenses of a business.

It shows the financial performance of the business. In other words, it shows how a company is converting its revenue into net profit.

The statement of profit or loss is also called trading, profit and loss account; income statement. 

it is one of the two primary financial statements that is prepared by a sole proprietor.

For a sole proprietorship, the format of statement of profit or loss is given as:

In this post, we'll go through each and every component of the income statement.

Forthwith, let's get started

Opening stock

This is the initial amount of stock that the company has available for sale or usage at the beginning of an accounting period. It is also known as opening inventory.

It is usually debited in the statement of profit or loss.

Closing stock

This is the total unsold stock as at the time the financial statement is prepared. It is also known as closing inventory.

Because these goods have yet to be sold, it is normally deducted from the cost of goods sold.

Purchases

This is the total amount of goods that a company buys for resale. 

It can also be defined as the total amount of inventory bought by a business during an accounting period with the aim of selling it.

Purchases are expenses that are added to the cost of goods sold because they are directly related to the goods sold.

Return outwards

These are goods that a company returns to its suppliers for a variety of reasons, the most common of which are defects.

Return outward is also known as purchases returns and are classified as contra-expense accounts

To get net purchases, we normally deduct returns outward from purchases.

Carriage inward

This is the cost of transportation for a company receiving goods from suppliers. 

They are included in the cost of goods sold since they are related to the cost of obtaining commodities for sale.

Sales

These are the revenue a company makes by selling its regular items or providing services. It is credited to a profit or loss statement since it constitutes revenue.

Return inwards

Customers do occasionally return goods to a business for various reasons. Return inwards is the goods that have been returned.

Return inwards are also known as sales returns since they are sales that have been returned. 

Net sale is easily obtained by subtracting sales from return inwards.

Gross profit

This is a company's profit after all costs directly connected to the cost of selling its goods and services have been deducted.

It is easily obtained by subtracting the cost of goods sold from net sales

Salaries and wages

This represented the total amount of remuneration paid to the company's employees and other workers. It is an outlay of funds and is treated as an expense accordingly

Advertisement

This figure shows the total cost and expense of promoting a business's goods. Advertisement is also an outlay of funds.

Insurance expenses

This is the total cost of obtaining an insurance contract, as well as any additional premium payments. 

Insurance expenses are normally calculated based on the amount of money spent on insurance within a given accounting period.

Any unexpired insurance is transferred to the prepaid insurance account.

Rent and rates

These are related to the company's real estate. Rent is a cost associated with using commercial rental property.

Rates are essentially a local levy on real estate use. Rent and rates are both expenses that must be deducted from total revenue.

Office maintenance cost

This represents the total cost of keeping the asset of the business in good working condition.

Sundry expenses

Some expenses are just too minor to warrant their own account. For example, a huge corporation purchasing a $50 pen may believe that it is insufficient to warrant a separate account. 

Sundry expenses are the total of all minor and infrequent expenses incurred by a company

Discount allowed

This is the total cash discount that a company offers to its consumers in order to encourage quick payment. 

It is an expense to the business because it reduces the business's net revenue from that transaction.

Discount received

While discounts allowed are cash discounts granted by a business to its customer, discounts received are cash discounts a business received from its suppliers. It is an income to the business

Miscellaneous expenses

This is just another name for sundry expenses

Telephone expenses

This is the total cost of all telephone services used during an accounting period, including fax lines, cell phones etc.

Carriage outward

This is the transportation cost incurred by a business to transport goods or services to its customers.

Bad debt

These are the total debts that a company no longer considers recoverable and must write off. It's the total sum that a company considers unrecoverable.

Because they are no longer recoverable, they constitute expenses to the business.

Provision for bad debt

This is simply an estimate of the amount that a business feels might end up as bad debt. 

To put it another way, it's an estimate of the total amount of debt that a company believes will result in bad debts

An increase in provision for bad debt constitute expenses and are found on the left side of the statement of profit or loss. 

On the other hand, a decrease in provision for bad debts constitute income and are found on the right side of the statement of profit or loss.

It's worth noting that provision for bad debt is also called provision for doubtful debt.

Depreciation

This is the portion of a fixed asset that has been consumed during an accounting year. Depreciation is viewed as an expense because it reduces a company's earnings.

Postage and stamps

This is the total expenses on stamps and postage. it is an indirect expense that is subtracted from gross profit.

Interest on bank loan

This is the total cost incurred by the firm for borrowed funds from the bank.

Rent received

This is the total amount of money a company earns in exchange for letting another company use its assets. They are viewed as additional income to the business

Commission received

This is the total money received from a person in exchange for any services performed to assist them in expanding sales, assisting in the purchase of goods, or relating to any other commercial transaction.

Service-based businesses are more likely to obtain commission.

Profit on disposal

This represents the gain that a company makes from selling a fixed asset. 

A company will earn a profit from the sales of a fixed asset if the selling price is higher than the asset's existing carrying value.

Because profit on disposal is a source of additional revenue for the company, it is recorded on the credit side of the income statement just below the net sales.

Loss on disposal

If the amount at which a fixed asset is sold is less than its present carrying value, the company will incur a loss on its disposal

Because loss on disposal reduces the income of the business, it is found in the debit side of the statement of profit or loss and is treated as an expense

Interest received

This is the money that a business received in addition to the loan amount from lending money to other people.

It is a company's total income from lent funds.

Indemnity from insurance

This is mostly associated with a business with insurance policy. 

Indemnity from insurance represents the total compensation a business receive from an insurance company for damages or losses suffered.

It is a special kind of income to the business and is treated as such.

Bad debt recovered

Businesses may get payment from debt after it has been written off as debt. This constitutes bad debt recovered.

A bad debt recovered (or a recover bad debt) is any payment for a debt after such debt has been considered irrecoverable and written off.

Net profit

This is the actual profit of the business after all direct and indirect expenses have been deducted from total revenue.

It is simply the difference between an entity's total income (Net sales plus additional income) and its total cost (cost of goods sold and expenses).

If there is no additional income, net profit will be equal to gross-profit minus expenses.

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To summarize, keep in mind that the income statement only contains nominal accounts.

A nominal account is any accounts about income, expenses, gains, and losses.

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