Preparation of income statement

Explanation of certain items in the income statement

1. Salary

Wages are paid for employee services and debited to profits as an indirect expense. If any wages have been paid to the holder or partners, it must be shown separately because it requires special treatment at the time of the income tax.

2. Salary and salary

When the payroll is included in wages, it is treated as indirect expense and is recognized in the income statement.

3. Rent

Renting the office showroom or godown is an indirect expense and is then charged to the income statement. However, factory rent is charged to a trading account. When part of the building is sublet, the rent received must appear on the credit side of the income statement as a separate item.

4. Prices and taxes

These are levied by local authorities to cover public expenditure. It is an indirect expense shown on the debit side of the income statement.

5. Interest

Interest on loans, overdrafts or overdue debt must be paid by the company. It is an indirect expense; then charged to income statement. Interest on loans that the company has obtained on deposit investments is an income for the company and is thus recognized in the income statement.

If the company has paid capital interest to its holder or partners, it must also be debited in the income statement, but separately, because this item needs special treatment at the time of the income tax.

6. Commission

In business, agents are sometimes appointed to complete sales that get commission paid as their remuneration. So this is a cost of sales appear on the debit side of the income statement. Sometimes commissions are also paid for the purchase of goods, such as expenses being charged to the trading account. Sometimes the company can also act as agent for the other business houses and in such cases it receives commission from them. The commission received is shown on the credit side of the income statement.

7. Trading costs

They are also referred to as ‘miscellaneous expenses’. Trading costs represent expenses of a kind for which it is not worth opening separate accounts. Trade costs are not recognized in the trade accounts.

8. Repairs

Repairs to the plant, machinery, building are indirect expenses are processed expenses and charged to the income statement ..

9. Travel expenses

Unless otherwise stated, travel expenses are treated as indirect expenses and charged to the income statement.

10. Horses and stable expenses

Expenses for feed of horses and wages paid to care for the stall are treated as indirect expenses and charged to the income statement.

11. Apprentice Premium

This is the amount charged from persons to whom vocational training is granted education. It is an income and is credited to the income statement. In the event that the apprentice premium is charged offset for two or three years, the amount is distributed over the number of years and each year’s income statement is credited to its share of the income.

12. Bad Debt

It is the amount that the trader could not recover due to credit turnover. It is a business loss, so it is charged to the income statement.

13. Life insurance premium

If the premium is paid on the life policy of the business owner; it is treated as his drawings and is shown by deduction from the capital account. It should not be taken to the income statement.

14. Premium insurance

If an insurance premium account is shown in the trial balance, it represents insurance for the company. This is recognized in the income statement. Insurance premiums for purchased goods, factory building, factory machinery are treated as direct costs and entered in trade accounts.

15. Income tax

In the case of a merchant, income tax is treated as a personal expense and is shown by deduction from the capital account. Income tax in the case of companies is treated differently.

16. Discount allowed and received

Discount is a reward for quick payment. It is a matter of belief to show the received discount and discount allowed separately on the credit and debit side of the profit and loss account respectively instead of showing the net balance on this account.

17. Depreciation

Depreciation is a loss arising from the use of fixed assets in the company. Generally, it is charged from the income statement to a fixed percentage. Students must exercise great care in the rate of depreciation. If the rate is without words ‘per year’, the rate is taken regardless of the accounting period. This is very important when the accounting period is less than one year. On the other hand, if the depreciation rate is ‘annual’, the depreciation must be calculated on the assets taking due account of the period during which the asset has been used in business during the year. In the case of asset additions during the year, it is advisable to ignore additions depreciation if the additions date is not specified. The same rule applies to the sale of assets during the year.

18. Stocks at the end are shown in the trial balance.

It is important to emphasize the rule that balances displayed in the trial balance are carried to one place. It can be either trade accounting or income statement or balance sheet. As the share at the end is an asset, it will be recognized in the balance sheet. On the other hand, as long as there are shares in trading, this has to be taken into account and therefore carried to the asset side of the balance sheet.