Basic Income Statement Example

In this article, you will get an insight into a basic income statement example and a step-by-step guide on how to do it easily.

An income statement is a financial statement that shows a company’s financial performance over a specified accounting year (mainly reporting its income and expenses).

Income Statement Formula

Gross profit = Net sales – COGS

Operating income/ EBIT = Gross – Operating expenses

Net income = EBIT – (interest expense + Tax expense)

Income Statement Example

Just keep the article to the point, going straight toward the basic income statement example.

The following balances have been taken from the preclosing trial balance of ABH Traders of December 31, 20XX.

Trial Balance

Particular	Debit	Credit
Bank	$ 100,000	$
Cash	140,000
Account Receivable	75,000
Merchandise Inventory (Opening balance)	35,000
Unexpired Insurance	25,000
Equipment	60,000
Accounts Payable		60,000
Bank Loan		130,000
Capital		237,000
Sales		305,000
Sales discount	5,000
Sales return	5,000
Commission income		17,000
Drawing	24,000
Rent Expenses	60,000
Purchases	230,000
Purchases Return		15,000
Transportation-in	5,000

Data for Adjustments
1. Merchandise Inventory valued at the year-end (Ending balance)	$60,000
2. Unpaid Rent	2,000
3. Insurance expired	12,000
4. Estimated Depreciation expense on equipment	4,000

Required:

Prepare an Income statement for the year ended 20XX.

1st Step: Make Adjusting Entries

If you are an expert you can prepare income statement directly. But if, you are a beginner you need to firts make adjusting entries from the above provided adjustment data.

Adjusting entries are made at the end of accounting period.The follwoing are the adjusting entries:

	General Journal
Date	Particular	Debit	Credit
Dec, 31	Merchandise Inventory	60,000
	Income Summary		60,000

	Rent Expenses	2,000
	Rent Payable		2,000

	Insurance Expense	12,000
	Unexpired Insurance		12,000

	Depreciation Expense	4,000
	Allowance for depreciation		4,000

First entry is related to the ending inventory.
Second data shows an amount for unpaid rent. So, now check trial balance, there you will see an amount of $60,000 for rent expenses. The unpaid rent shows that you have to pay more rent expense in future and that expense is related to this period. So, in this case it becomes a rent payable.
The third point shows the insurance expense of $12,000. Again now check trail balance, it shows an unexpired insurance of $25,000. Now, as you know that unexpired insurance is prepaid insurance which means that you have paid that amount earlier. Now, the prepiad $12,000 is converted to expense at the end of the month.
The fourth point shows an amount of $4,000 indicating depreciation expense for the period.

2nd Step: Prepare Adjusted Trial Balance

Now prepare adjusted trial balance by adjusting the balances and accounts from the adjusting entries. Here is the adjusted trial balance:

Adjusted Trial Balance
Particular	Debit	Credit
Bank	100,000
Cash	140,000
Account Receivable	75,000
Merchandise Inventory ending balance)	35,000
Unexpired Insurance	13,000
Equipment	60,000
Accounts Payable		60,000
Rent Payable		2,000
Bank Loan		130,000
Capital		237,000
Sales		305,000
Sales discount	5,000
Sales return	5,000
Commission income		17,000
Drawing	24,000
Rent Expenses	62,000
Insurance Expense	12,000
Depreciation Expense	4,000
Allowance for depreciation		4,000
Purchases	230,000
Purchases Return		15,000
Transportation-in	5,000
Total	770,000	770,000

3rd Step: Prepare Income Statement

ABH Traders
INCOME STATEMENT
*FOR THE YEAR ENDED Dec 31, 20XX*

Revenue
Sales		305,000
Less: Sales discounts	5,000
Sales return	5,000
		(10,000)
Net sales		295,000
Less: Cost of goods sold
Beginning inventory	35,000
Add: Purchases	230,000
Freight-in	5,000
	270,000
Less: Purchase return	(15,000)
Goods available for sale	255,000
Less: Ending inventor, Dec 31	(60,000)
Cost of goods sold		(195,000)
Gross profit		100,000
Operating expenses
Depreciation expenses	4,000
Rent Expense	62,000
Insurance Expense	12,000

Total Operating Expenses		(78,000)
EBIT (Earnings before interest & tax)		22,000
Add: Other income
Commission Income		17,000

Net income		39,000