Income Statement

Exam code: 7707

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

The income statement of a limited company is prepared in the same way it is prepared for that of a sole trader or a partnership business
It is prepared annually
It is the first of the three financial statements that must be prepared for limited companies
The only difference is seen in the finance costs
- Debenture interest and redeemable preference share dividends are included as part of finance costs
- These appear after the profit from operations
Dividends for ordinary shares and non-redeemable preference shares do not appear on the income statement

Worked example

The trial balance of Abrakadabra Limited at 31 March 2024 was as follows:

Abrakadabra Limited Trial Balance at 31 March 2024
	Debit $	Credit $
Revenue		166 000
Inventory at 1 April 2023	6 820
Purchases	65 900
Rent and insurance	10 280
Wages	25 850
Operating expenses	9 600
Fittings at cost	250 000
Provision for depreciation of fittings		75 000
Trade receivables	14 400
Bank	14 965
Trade payables		8 415
4% Debenture (repayable in 10 years)		46 000
Ordinary share capital		80 000
Retained earnings		28 000
Dividends paid on ordinary shares	5 600
	403 415	403 415

Additional information:

Inventory at 31 March 2024 was valued at $7 080
Depreciation on fittings is to be charged at 20% method per annum using the reducing balance
Rent includes a payment of $2 700 for the 3 months from 1 March 2024 to 31 May 2024
Accrued wages at 31 March 2024 were $4 550
No debenture interest has been paid for the year ended 31 March 2024
No dividends were outstanding at 31 March 2024
$2 200 of the retained earnings is to be transferred to a general reserve on 31 March 2024

Prepare the income statement for Abrakadabra Limited for the year ended 31 March 2024.

Answer:

Abrakadabra Limited Trial Balance at 31 March 2024
	Debit $	Credit $	Income Statement?
Revenue		166 000	IS
Inventory at 1 April 2023	6 820		IS
Purchases	65 900		IS
Rent and insurance	10 280		IS
Wages	25 850		IS
Operating expenses	9 600		IS
Fittings at cost	250 000
Provision for depreciation of fittings		75 000
Trade receivables	14 400
Bank	14 965
Trade payables		8 415
4% Debenture (repayable in 10 years)		46 000
Ordinary share capital		80 000
Retained earnings		28 000
Dividends paid on ordinary shares	5 600
	403 415	403 415

Deal with the additional notes and identify how they affect the income statement

Item 1 - The closing inventory will be subtracted as part of the cost of sales

Item 2 - Find the year's depreciation charge

$250 000 - $75 000 = $175 000

20% × $175 000 = $35 000

Item 3 - Subtract the prepaid rent from the balance

$2 700 ÷ 3 = $900

$900 × 2 = $1 800

$10 280 - $1 800 = $8 480

Item 4 - Add the accrued wages to the balance

$25 850 + $4 550 = $30 400

Item 5 - Calculate the debenture interest

4% × $46 000 = $1 840

Item 6 - Dividends for ordinary shares do not affect the income statement

Item 7 - Transferring money to the general reserve does not affect the income statement

Prepare the income statement using the usual layout
Remember to put the debenture interest after the profit from operations as it is a finance cost

Abrakadabra Limited Income Statement for the year ended 31 March 2024
	$	$
Revenue		166 000
Less: Cost of sales
Opening inventory	6 820
Purchases	65 900
	72 720
Less: closing inventory	7 080	65 640
Gross profit		100,360
Less: Expenses
Rent and insurance	8 480
Wages	30 400
Operating expenses	9 600
Depreciation of fittings	35 000	83 480
Profit from operations		16 880
Debenture interest		1 840
Profit for the year		15 040

Income statements for limited companies