In this article, I’d like to explain the basics of income statement for the purpose of taking the Class S of the Bookkeeping exam offered by the Japan Chamber of Commerce.
The income statement (also known as the profit and loss statement with the abbreviation P/L) presents the profit of a business during a specific period of time. Frequently used periods are 1 month for monthly reporting, 3 months for quarterly reporting, 6 months for interim results, and 1 year for final financial results.
In its basic form, the income statement is represented by the following equation.
Revenues - expenses = net income (or net loss)
Let’s take a look at examples of ledger accounts under revenues and expenses.
The following ledger accounts are categorized as revenues.
- Sales revenue: Money obtained by selling goods.
- Service revenue: Money obtained by providing service.
- Interest revenue: Interests on bank deposits and other money lent.
- Foreign exchange gain: Profits on fluctuations in foreign exchange rates
The following ledger accounts are categorized as expenses.
- Utilities expense: Water, gas, and electricity expenses
- Salaries and wages expense: Salaries and wages you pay to your employees.
- Rent expense: Rent for your office.
- Interest expense: Interest on bank loan and other money you borrow.
- Foreign exchange loss: Loss on fluctuations in foreign exchange rates
- Income tax expense: Tax you pay on your profits.