The summary of all accounts dealing with transactions relating the revenue and expenses is termed as profit account. The account is termed as statement wherein information is accumulated relating to the item giving information regarding expenses and revenue.
The income statement is the details of revenue and expenses. The income statement provided to the suppliers, debtors, creditors, bankers, etc is different as compared to the income statement prepared for the management. The income statement provided to the management is much more detailed as compared to the income statement provided to the suppliers, etc. Usually, the income statement provided to management contains last three years revenue and expenses. The gross revenue information details along with per share revenue like EPS and CEPS (Earning Per Share, Cash Earnings Per Share), profit, etc. Is enclosed for the perusal of management and investors.
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Reason For Making Income Statement :
1. Debt Servicing Cost
Income statement helps the company to know that whether they are in a position to recover the interest paid on borrowing from the bank, market (both secured and unsecured loans) or not.
2. Return on Investment
It is very important to know whether the reasonable return is being paid to the investors, shareholders both equity and preference or not. The company would also like to maintain different types of reserves like the general reserve, capital reserve, special reserve, etc.
To know Income, Company is making from routine, normal day-to-day operations.
4. Success or Failure of Management
Whether Company is making reasonable returns from the capital deployed by them. If the returns are better than the competitors, then the policies of the management are considered as successful.
Whether the goods or/and services offered by the company are popular in the market or not. If the sale is improving or is better than the competitors, then it is considered that the services/goods offered are popular.
6. Price Sensitivity
The impact on the sale by increasing or reducing the price is known from the income statement and this helps management in deciding whether to increase or reduce the rate and by what percentage.
7. Profit Centered or Volume Centered
The price sensitivity helps management in deciding that the policy of the management should be price centred. The high volume
of the sale will give a lower percentage of profit as compared to the low volume of sale will increase if the price of the product is reduced. At times by reducing the price the volume of sale is increased considerably and the management makes more profit even if the percentage profit on the sale is lower.