Income Statement

The income statement — also called the profit and loss account (P&L) — presents a company’s revenues, expenses and resulting net profit or loss for a specific accounting period. Under FRS 102 and the Companies Act 2006, every UK company must prepare an income statement as part of its annual accounts.

Structure of the Income Statement

UK companies typically follow one of two formats prescribed by the Companies Act:

Line Item	Description
Turnover	Revenue from the company’s principal activities
Cost of goods sold	Direct costs of producing goods or delivering services
Gross profit	Turnover minus cost of goods sold
Administrative expenses	Overheads , salaries, rent, depreciation
Operating profit	Gross profit minus administrative and distribution costs
Interest receivable / payable	Income from deposits and cost of borrowing
Profit before tax	Operating profit adjusted for financial items
Corporation tax	Tax charge for the period (currently 25% main rate)
Net profit	Profit after tax — transferred to retained earnings

Worked Example

	£
Turnover	500,000
Cost of goods sold	(300,000)
Gross profit	200,000
Administrative expenses	(120,000)
Operating profit	80,000
Interest payable	(5,000)
Profit before tax	75,000
Corporation tax (25%)	(18,750)
Net profit for the year	56,250

Key Relationships

The income statement connects to other financial statements:

Balance sheet — net profit increases equity via retained earnings
Cash flow statement — net profit is the starting point for indirect-method cash flows
Trial balance — all income and expense balances feed into the income statement

Income Statement vs Management Accounts

	Statutory Income Statement	Management Accounts
Audience	HMRC, Companies House, shareholders	Internal management
Format	Companies Act prescribed format	Flexible — by department, product, project
Frequency	Annually (sometimes interim)	Monthly or quarterly
Detail	Aggregated line items	Granular cost centre analysis

Filing Requirements

Company Size	Must File at Companies House?	Abbreviated Format Available?
Micro entity	Yes — but can use micro accounts	Yes (no P&L required in filed accounts)
Small	Yes	Abridged format permitted
Medium / Large	Yes — full accounts	No

All companies must submit a full income statement to HMRC with their corporation tax return , regardless of size.

Using the Income Statement for Analysis

Key financial ratios derived from the income statement:

Ratio	Formula	What It Shows
Gross profit margin	Gross profit ÷ Turnover × 100	Efficiency of production / service delivery
Operating margin	Operating profit ÷ Turnover × 100	Profitability after operating costs
Net margin	Net profit ÷ Turnover × 100	Overall profitability after all costs and tax
Break-even revenue	Fixed costs ÷ Contribution margin ratio	Revenue needed to cover all costs