Measuring and reporting financial performance
The purpose of income statement is to measure and report how much profit the business has generated over a period.The measurement of profit requires that the total revenues of the business generated during a particular period, be calculated.Revenue is simply a measure of the inflow of assets (cash or amounts owed to a business by debtors) or the reduction in liabilities which arise as a result of trading operations.It is not necessary for a business to receive cash before recognizing that revenue has been earned. The accruals concept recognizes revenue which arises from the sale of goods or services on credit.
The total expenses relating to the period must also be calculated. An expense represents the outflow of assets (or increase in liabilities) which is incurred as a result of generating revenues.Expenses are goods and services consumed in operating a business or other economic unit.
The income statement for a period shows the total revenue generated during a particular period and deducts from this the total expenses incurred in generating that revenue. The difference between the total revenue and total expenses will represent either profit (if revenues > expenses) or loss (if expenses > revenues).
Where revenues and expenses are equal for the period, the business is said to break even.Profit (loss) = total revenue --- total expenses incurred to generate the revenue The income statement and the balance The profit and loss account can be viewed as linking the B.S. at the beginning of the period with the B.S. at the end of the period. Thus, at the commencement of business, a B.S. will be produced to reveal the opening financial position. After an appropriate period, an I.S. will be prepared to show the wealth generated over the period. A B.S will also be prepared to reveal the new financial position, at the end of the period covered by the I.S.
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