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)

Basic Income Statement Example

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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   
DateParticular  Debit  Credit 
Dec, 31Merchandise 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
    
  1.  First entry is related to the ending inventory.
  2. 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.
  3. 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. 
  4. 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 discounts5,000 
          Sales return5,000 
  (10,000)
          Net sales 295,000
Less: Cost of goods sold  
Beginning inventory35,000 
Add: Purchases230,000 
         Freight-in5,000 
 270,000 
Less: Purchase return (15,000) 
          Goods available for sale255,000 
Less: Ending inventor, Dec 31(60,000) 
          Cost of goods sold (195,000)
          Gross profit 100,000
Operating expenses  
          Depreciation expenses4,000 
          Rent Expense62,000 
          Insurance Expense12,000 
   
Total Operating Expenses  (78,000)
EBIT (Earnings before interest & tax)  22,000
Add: Other income   
          Commission Income  17,000
  

 

 

          Net income 39,000

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Hiffza Aziz - Author

She is a Xero Advisor Certified and Remote Account Assistant, where she prepare monthly financial reports for the clients. She is a highly motivated and detail-oriented individual with a passion for learning.

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