The most important thing about the income statement
Income and loss account: Creates the annual accounts according to the Business Act with balance sheet and annexes
legal basis: §275 HGB
WHO: Anyone who, according to the HGB, is “obliged to keep accounts“ is
As: total cost or cost of sales method
purpose: Help with internal and external accounting
sources of success: Shows how profit or loss occurs
There are a number of documents for companies that are of great importance for both internal and external considerations. The best known and most important documents for any company that reaches a certain size are the balance sheet on the one hand and the income statement on the other. The income statement shows any a profit has been achieved in the past financial year or a loss must be reported.
What is an income statement?
GuV is an abbreviation for the income statement. This is important in companies part of the annual accounts, which must be prepared annually. However, not all companies are required to submit and create a GUV in advance, but this only applies to self-employed traders of a certain size.
The income statement makes a statement as to whether there was a entrepreneurial success or loss must be generated. For this purpose, the expenses on the one hand and the income on the other hand, which relate to a certain period of time, are balanced within the framework of the general meeting. As a result, it is possible to read the company’s result for the past financial year by looking at the income statement.
The company has made a profit if within the income statement income greater than that expenses is. If the picture is reversed, that is, expenses are higher than income, then a loss is reported in the P&L. The result based on the income statement can therefore be negative on the one hand, but also positive in terms of balance.
Who must prepare an income statement?
As a rule, not all companies, self-employed persons and freelancers are required to prepare a profit and loss account. Instead, there are sales and profit limits, so that a profit and loss statement only needs to be prepared if these are exceeded. In addition, the obligation to create an income statement only applies to companies and the self-employed, who in turn are obliged to keep proper accounts.
This means that companies and the self-employed must then prepare an income statement if the profit within the year was 60,000 euros or more. Alternatively, the obligation to create the income statement applies if the turnover was 600,000 or more. However, there is an exception for freelancers because they do not have to prepare an income statement even if they exceed the above limits.
The most important provisions of the HGB
The most important rules for the income statement are found almost exclusively in the HGB, i.e. the Commercial Code. Here it is primarily section 275, in which very important rules regarding the income statement are listed. For example, this and other sections of the Commercial Code specify how various transactions must be included in the income statement, such as:
- Extraordinary expenses
- inventory changes
- Extraordinary depreciation
As a result, there are strict guidelines within the HGB as far as the rules for the income statement are concerned. Only for sole proprietorships and partnerships are the respective rules not quite so strict.
An important aspect of the income statement is also regulated in the HGB, namely the so-called balance sheet continuity. Basically, there are several ways in which the income statement can be structured. But once the company has decided on a particular form, it must also be maintained in the subsequent period. In technical jargon, this is called balance continuity.
Structure and structure of the income statement
There are several ways in which an income statement can be structured and structured. However, all models have in common that the expenses are always on the left side, while the income is listed on the right side. Common to every structure is also that the numbers and dates refer to a fixed period. It is basically the self-employed person’s or company’s financial year.
Income is always posted as a credit, expenses as a debit instead. In the following, we would like to briefly discuss two possible structural types of the income statement, namely the scale or account form and the cost of sales or total cost method.
Graduated or account form in the income statement
One way to structure and structure an income statement is the so-called scale or account form. Characteristic of the first alternative, the account form, is the division into debit and credit. Expenses appear on the debit side, while income appears on the credit side. The company has then made a profit provided that there is a posting of the balance on the debit side. Then the credit side dominates, so that income is greater than expenditure.
Alternatively, the relay form can also be used with this type of structure. However, the account form is chosen more frequently in practice, as the graduation form is more complex, especially for self-employed and smaller companies. In contrast to the chart of accounts, the scale chart must be divided in such a way that all costs are set off against each other. So that the result can then be read from the income statement, the corresponding items must be pre-calculated in several phases.
The difference between the cost method and the nature of the expense method
With the profit and loss statement, it is not only possible to structure on one side according to the scale and on the other according to the chart of accounts. Alternatively, one of the following two methods can also be used, namely either the total cost method or the cost of sales method. Both methods are based on the calculation of the turnover that the self-employed or companies have generated within their business period.
With the cost of sales method, only those costs are incurred for goods that have already been sold or services that have been used by the end consumer. In addition, the cost of sales method breaks down which costs must be allocated to which functional areas. The cost of sales method is somewhat more informative than the expenditure method and is therefore used by the vast majority of companies and the self-employed.
In the following table, we show an example of an income statement based on the cost of sales method:
|–||2. Production costs to obtain the service||€40,000.00|
|=||3. Gross profit on sale||€140,000.00|
|=||Operating profit (EBIT)||€90,000.00|
The nature of expenditure method is characterized by that juxtaposition that Costs on the one hand and income on the other hand. Accordingly, a decrease in inventory is recorded as an expense, while an increase in inventory represents revenue. In addition, a cost type breakdown is performed as part of the expense method. The corresponding expenses are differentiated, for example, into material and personnel costs.
In the following table, we show an example of an income statement based on the nature of the expense method:
|+||2. Increase in inventory||€30,000|
|–||3.-8 Expenses (including other related income)||€120,000|
|=||Operating profit (EBIT)||€90,000.00|
What is the gross and net principle?
In addition to the structure already mentioned, there is another way in which the income statement can be divided. In the vast majority of cases, the P&L is based on the so-called rough principlesince in most cases this is anyway legally required is. This gross principle means that all individual items in the income statement must be listed. The alternative is much less common, namely the net principle. In this case, income and expenses are offset, which are therefore much less detailed.
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What functions does the income statement have?
P&L is a very important document because several functions are performed through P&L. This includes, for example, the so-called Distribution measurement function. This is of particular interest to companies operating as joint stock companies. There is the annual result, which can be read on the income statement, often as a basis for the extent to which dividends are paid. In addition to the distribution calculation function, the income statement has three other functions, namely:
- analysis function
- rating function
- information function
How does depreciation affect the income statement?
as depreciation will Depreciation of assets within accounting designated. In other words, the corresponding values suffer a loss in value in the form of depreciation. First of all, the production and acquisition costs for the corresponding tangible assets that belong to fixed assets must be written off. Consequently, depreciation leads to a reduction in profits.
For this reason, it is stipulated that depreciation must be shown separately in the income statement. The division takes place in the depreciation after the nature of the expense method and depreciation according to the cost method. Depreciation according to the expense method is based on § 275, subsection 2, HGB and relates to the following items, which then appear in the income statement:
- Depreciation on intangible and tangible fixed assets
- Depreciation of financial assets and marketable securities
On the other hand, there are also depreciations Cost of sales method. While amortization of financial assets and securities held as current assets must also be shown in individual income statement items within the cost method, this is not possible with amortization of intangible and tangible fixed assets.
This is because some of this depreciation is already included in cost of goods sold, selling expenses and general and administrative expenses. However, it is possible to use a so-called asset history sheet on the basis of § 268 HGB.
How often must an income statement be prepared?
Normally, it is mandatory to make an income statement every year. This usually happens at the end of the financial year. For larger companies in particular, it can also make sense to also create the profit and loss statement within a short period, i.e. within a year. Typical frequencies are, for example, a monthly or quarterly income statement. This enables the company to see relatively quickly whether a profit is likely or whether certain measures should be taken to prevent a loss.