Welcome, today, we learn to read income statement of a company
In the income statement, there are two main sections one is incomes and second is expenses. Incomes means what money comes in the pocket of company and expenses means what money goes out of the pocket of company.
1. Income section of Income Statement
With this section, we get two answers
What amount of money comes in the pocket of company in one year
From where does company earn this money.
(A) In this section, there is first term is revenue from operation
Operation means business. Company what money earn from sale of its products. For example, If I have the business of ebook selling. Then my operation of business revenue is total sale of my ebooks in one year in different platforms.
For example if I sold Journal entries ebook in financial year 2021-2022
1,00,000 at the rate of Rs. 1000 per, then my revenue from sale of this ebook is
= 100,000 X 1000 = 10,00,00,000 = Rs. 10 Crores
(B) Other income
Other income are those which is not the revenue from business. Suppose, if my business is selling of ebook and I am earning money from share market and profit from sale of my mutual fund investment, it will be my other income.
2. Expenses Section
Now, we learn all about of expenses in income statement
(A) Direct Expenses
Direct expenses are relating to the direct connected to their production of product.
Suppose,
I am making the ebooks on google docs and google docs is getting the space rent. Its cost is the part of direct expenses of my ebook.
I am appointing the employee to write and produce new ebook, that labour cost is the part of direct expenses
(B) Operating Expenses
Operating expenses are those which I have to pay the operation of my business
like
1. mobile charges
2. internet charges
3. annual fees of my website domain
4. deduction by my payment gateway
5. Online marketing cost
6. Electricity bill
(C) Finance expenses
If company gets loan from anywhere its payment of interest will be the finance expenses of company
(D) Depreciation and Amortization expenses
If company has tangible assets like furniture, building and machines, its value will decrease after time and there is need to decrease its value with the amount of depreciation.
For example, if today machine value is Rs. 1,00,000 and after one year its value is Rs. 90,000, then depreciation expenses is Rs. 10,000
There are different methods of calculating depreciation
One is straight line method
second is diminishing method
When there is intangible assets, we have to show the expenses of amortization
All the assets which we can not physically touch
like
computer software
patent
goodwill
After some time, its value will decrease, so, we have to show its loss as amortisation expenses
(C) Other Expenses
All expenses which does not cover in above, will add in other expenses
Like warranty expenses
3. PBT and PAT
With adding all expenses, we find the total expenses and
after deducting total incomes from total expenses, we will find
Profit before tax (PBT)
Deduction of tax
Profit after tax
If any company manufactured Rs. 5,00,000 cost material and sold Rs. 4,00,000 material and rest is unsold Rs. 1,00,000, it is our closing stock which is our current asset and will show in the balance sheet.
Related Topic
How to Read the Balance Sheet of a Company - Part 1
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