Meanings of Income Statement Part I

Meanings of Income Statement Part I

You are an entrepreneur and want to know how successful you actually are. But you don’t know where to look. Is it enough to look at your bank account? No, it’s not enough. The key is the income statement. It shows whether your entrepreneurial activity has led to a positive or negative result.
In short, the income statement determines the success, but also the failure of your company or a company department.

There are four different types of income statement:

  • The income statement in the commercial balance sheet, which compares the expense with the income. This is the income statement .
  • In cost and performance accounting, it is the imputed income statement. It shows the operating result , which results from the balance between costs and services.
  • For submission to the tax office, the tax balance sheet.
  • The income / expenditure account.

Each of these calculations leads to a different result, since the type of calculation is different in each case.

Why is an income statement necessary?

Of course, you can also guess from your bank account balance whether your business is doing well or badly. But you cannot make a sure statement with it, because the bank account balance only shows you a snapshot. The income statement is the most important instrument in controlling and thus serves to continuously control the company through the planning and control of company data. In addition, it can be used to determine production costs, prime costs or offer prices. The income statement (profit and loss account), on the other hand, has a purely informational function for those involved in the company, for example.

The job of the income statement

The main task of the income statement is the clear and complete recording of the costs and sales in connection with your services or products. These are to be presented clearly structured.

The income statement

You are sure to know the income statement (P&L) as part of the annual financial statements when you have to make a balance sheet. It is the big sister of the Revenue Excess Account . If the expenses are higher than the income, you will make a loss. In the opposite case, a profit.

The profit and loss account is usually drawn up for one year. Exceptions are company start-ups during the year if no different financial year is desired. Income is posted in credit, expenses in debit. At the end of the financial year, expenses and income are compared and a profit or loss is determined. A profit increases your equity. Loss mitigates it.

Forms of income statement

A distinction is made between account and scale form:

Example for the account form:

expenditure Yield
Purchase of goods Sales
Personnel costs Interest income
Depreciation Rental income
Interest expenses Commissions

Example for the scale form:

operating income
-operating expenses
= Operating result / EBIT (earnings before core business)
+/- financial result (interest income / interest expense)
= EGT (result of ordinary business activity)
+/- extraordinary income / expenses
= Annual result (before taxes)
= Annual result (after taxes)
+ Release of reserves
– Allocation of reserves
= Net profit / net loss

If you are a sole trader and you have a partnership, you can choose between account and staggered forms. A corporation must use the graduated form for the annual financial statements.

The regulations for the profit and loss account can be found in the Commercial Code. (§ 242 III HGB)

In addition to the presentation of the P&L in the account or scale form, the total cost method or the cost of sales method can also be used. However, once you have decided on a shape, you have to keep it for the following years because of the comparability.

According to, the cost of sales method is preferred by many companies because it is more informative. Only the costs incurred for the services and products actually sold are taken into account. It is structured according to the different areas, such as sales, production, etc. The total cost method compares the total costs with the revenues. Inventory reductions are booked as expenses and increases as income.

Example of the cost of sales method

Sales € 10,000,000
– Production costs of the services provided to generate sales – € 6,000,000
= Gross profit on sales = € 4,000,000
– distribution costs – € 1,000,000
– Administrative expenses – € 600,000
+ Other operating income + € 200,000
– Other operating expenses – € 600,000
= Operating result (EBIT) = € 2,000,000
+ Income from investments + € 100,000
+ Income from other securities and loans from financial assets + € 150,000
+ other interest and similar income + € 100,000
– Depreciation on financial assets and on securities held as current assets – € 50,000
– Interest and similar expenses – € 800,000
– Taxes on income and earnings – € 300,000
= Earnings after taxes = € 1,200,000
– Other taxes – € 0
= Annual surplus = € 1,200,000

Income Statement 1