Income statement (limited company) format

The standard format

1. Revenue less cost of sales gives gross profit
2. Less: operating expenses
3. Less: debenture interest
4. Profit for the year
5. Appropriation: retained earnings, transfers to reserves, dividends

Filled example

Notes

• Debenture interest is an expense, charged before profit for the year.
• Dividends and reserve transfers are appropriations, after profit for the year.
• Retained earnings accumulate in the equity section.

Building and reading this format

A limited company's income statement works down in stages, from sales to the profit that belongs to the shareholders. Each subtotal on the way is a checkpoint that tells the reader something a single bottom-line figure cannot.

Start with revenue, the value of goods sold in the year. Deduct cost of sales (opening inventory plus purchases, less closing inventory) to give gross profit. Gross profit shows how well the company manages its core trading margin.

If it is thin compared with revenue, the problem is pricing or purchasing, and cutting costs elsewhere will not fix it. Keep only trading items in this section.

Below gross profit come the operating expenses, the running costs such as wages, rent, insurance, depreciation and administration. Group and total them, then deduct them. Add any other income, such as rent received, to reach profit from operations.

For example, revenue is RM500,000, cost of sales is RM300,000 and expenses are RM120,000. Gross profit is RM200,000 and profit from operations is RM80,000. Two companies with the same gross profit can have very different operating profits, depending on how well they control overheads.

Next come the steps specific to a company. Deduct finance costs, mainly interest on loans and debentures, because interest is the cost of borrowing and not an operating cost. Showing it separately lets the reader judge the burden of the company's financing.

If the question gives a tax charge, deduct it next. The result is profit for the year.

Keep this order fixed. Swapping steps misstates the subtotals even if the final figure is right.

Dividends and transfers to reserves are not expenses. They are appropriations, which means they show how profit is used.

In the format on this page they sit below profit for the year, in a separate appropriation section. What is left is the retained earnings for the year, which join retained earnings in the statement of financial position.

Read the subtotals in sequence. A healthy gross profit with a weak operating profit points to overheads. A strong operating profit undone by heavy finance costs points to too much borrowing.

Marks are mostly lost by putting an item in the wrong section. Loan interest among operating expenses overstates operating costs and understates finance costs. Jumping from gross profit straight to profit for the year, without the subtotals, loses marks because the marks are in the subtotals.

Other slips are calling revenue "sales returns" and writing "profit before tax" where "profit for the year" is wanted. Another is putting dividends above profit for the year as if they were an expense.

If limited company income statements still feel like a maze of subtotals, we can help. One of our teachers can build one with you line by line from a past-paper trial balance. Book a trial class

Related how-to

• How to prepare a limited company appropriation
• How to calculate cost of sales

These formats are standard accounting practice with our own figures. Check your board's exact requirements on the exam boards page.