Income statements: an introduction

6 important questions on Income statements: an introduction

From what consists the income statement?

The income statement consists of the trading account and profit and loss account. They are not part of the double entry system

What purpose serves the trading account?

It is prepared to arrive at the gross profit.

What purpose serves the profit and loss account?

It is prepared to arrive at the figure for net profit.
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Why is a trading account created?

To close off the sales and purchases accounts at the end of the period so that they start the next period with no balance.

What are the entries after creating a trading account?

(A) The balance of the sales account is transferred to the trading account by:
1. Debiting the sales account (thus closing it).
2. Crediting the trading account

(B) The balance of the purchases account is transferred to the trading account by:
1. Debiting the trading account.
2. Crediting the purchasing account (thus closing it).

(C) There is, as yet, no entry for the closing inventory in the double entry accounts. This is achieved as follows:
1. Debit a closing inventory account with the value of the closing inventory.
2. Credit the trading account (thus completing the double entry).

How can you draw up a profit and loss acount?

- Transfer the gross profit from the trading account to the credit of the profit and loss account.
- Any revenue account balances other than sales are transferred to the credit of the profit and loss account.
- The costs used up in the year are transferred to the debit of the profit and loss account.

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