Understanding the Income Statements

What is income Statement?

An Income Statement or the Statement of Financial Performance is a formal statement showing the financial performance of certain business organization. It provides measurement of income earned by the entity through the effective and efficient use of the company's resources for a given period of time.

Approaches to Income Statement measurement

There are basically two approaches on how income statements are being measured. These are the Capital Maintenance Approach and Transaction Approach. When we say Capital Maintenance Approach, it means that net income occurs only after the capital used from the beginning of a particular period is maintained. Meaning, under this method, we have to first set aside an amount equal to the capital used before we distribute the remaining profit. This is why, the same is also called the Net Assets Approach.

Traditional Approach, on the other hand, is the conventional or traditional way of measuring the Net Income of a particular company. It follows the financial reporting standard. The approach requires the determination of how much income were gained during the period and how much expense were incurred in earning the income.

Sales                                 xxx

COGS                             (xxx)

Gross Profit                      xxx

Operating Expenses        (xxx)

Net Income                      xxx