Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes: Accounting for Limited Liability Companies: Income Statement

  • As already pointed out in our introduction
  • The structure of the Income Statement ( Profit and Loss part) prepared for limited liability companies such as Private Limited (PVT LTD) and Public Limited Liability companies
  • is especially different from those prepared for sole traders and partnerships
  • One big difference is that companies are required to publish their financial statements at least once a year
  • The format of these financial statement is set out in International Accounting Standards
  • These standards dictate that the financial statements should show
  • a true and fair view of the state of affairs and financial performance of the company
  • What this means is that the financial statements need not be accurate they only need to show the correct values
  • This is because some figures by necessity have to be estimated for example depreciation and the value of inventory is often estimated
  • At this level you only need to be aware that there are standards which govern the structure and contents of the financial statements of limited liability companies
  • You do not need to know these standards in any detail we will therefore skip to show you the structure of a typical income statement
  • We repeat: Unlike the accounts of a sole trader or partnership whose format is up to the owners the content of financial statements of companies is set by law and standards it is illegal to deviate from it
  • Below is a typical structure of an Income Statement prepared for companies
$
Revenue (Sales)xxxxx
Cost of Sales1

(xxx)
Gross Profitxxxx
Other Income

xxx
xxxxx
Distribution Expenses(xxx)
Administrative Expenses(xxx)
Other Expenses2

(xxx)
Profit before interest and taxxxxx
Finance costs

(xxx)
Profit before taxxxx
Tax expense(xxx)
Profit for the year(period)

xx
  • As you can tell the format is not entirely different from the sole trader examples we have looked at in other topics
  • The difference is that most expenses are grouped together for example: Other Expenses, Distribution Costs etc
  • It is probable that some users of these accounts for example shareholders would want to know what these costs entail or how for example the Cost of Sales figure was arrived at
  • For this reason published financial statements of companies are often accompanied by referenced notes
  • This notes offer detailed explanations of various lines items when and where required
  • For example note 1 could show workings for the Cost of Sales figure and note 2 would show a detailed expansion of other expenses
  • The structure of the Statement of Financial Position For Companies can be found here

To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.