Preparation of Income Statement

1. Income Statement is provided by the issuer to determine the cost of sales, gross profit (or gross loss), and thus net profit (or net loss) from the sale of finished goods.

2. The cost of producing finished goods from the Production Account will be transferred to the Income Statement to replace the purchase detail in the Income Statement.

3. The Income Statement consists of two parts:

  1. Trading Statement section that determines gross profit from the sale of finished goods (profit before deducting expenses)
  2. Profit and Loss Statement section that determines the net of sales of finished goods (gross profit deducted by all expenses)

4. Besides production cost, the expenses of a manufacturing company can be divided into three types:

  • Sales and distribution expenses
    – This includes all expenses for distributing, selling, or promoting sales such as out carriage, salesman, advertising expenses, and sales commissions.
  • Administrative Expenses
    – This includes all expenses for administering, managing, and operating a company such as office salary, and all office expenses.
  • Financial Expenses
    – This includes all expenses related to financial management aspects such as bank charges, discounts, bad debt, and interest on borrowings


Prepare the income statement from the following details quoted from the books of Best Quality Manufacturing Company on 31 Dec 1998