Income Statement

Definition

The Income Statement (also called Statement of Operations or Profit and Loss) summarizes a corporation's revenue and expenses for a defined period, typically the fiscal year, and arrives at net income or loss. It explains the change in retained earnings from operations, excluding dividends and capital transactions.

Key rules

ASPE 1520 requires separate presentation of revenue, cost of sales, other operating expenses, income taxes, and any discontinued operations. Extraordinary items are no longer permitted under ASPE; unusual items are disclosed within continuing operations.

Revenue is recognized under ASPE 3400 when performance is substantially complete, measurement is reliable, and collection is reasonably assured. For service corporations this usually means as services are delivered.

Example

Multi-step income statement for a consulting CCPC:

Revenue
  Consulting revenue                     180,000
  Interest income                            420
  Total revenue                          180,420

Expenses
  Salaries and benefits                   72,000
  Rent and home office                     6,400
  Software subscriptions                   3,600
  Professional fees                        2,200
  Insurance                                1,800
  Telephone and internet                   1,500
  Amortization                               950
  Other operating expenses                 3,150
  Total expenses                          91,600

Income before income taxes               88,820
  Current income tax expense               9,770
Net income                               79,050

The $9,770 tax expense reflects the 11% combined federal and BC small-business rate applied to taxable income after Schedule 1 adjustments. Book income of $88,820 rarely equals taxable income because of temporary differences (amortization vs. CCA) and permanent differences (50% meals). See matching principle.

Common mistakes

• Recording revenue when cash is received rather than when earned. ASPE requires accrual presentation.
• Failing to separate amortization expense from the underlying operating cost so it can be added back in the cash flow statement.
• Mixing GST-collected into revenue. Revenue is net of GST/HST and PST collected on behalf of the Crown.
• Presenting owner dividends as an expense. Dividends reduce retained earnings on the statement of retained earnings, not net income.
• Grouping unusual one-time gains with operating revenue without disclosure.

Related concepts

Net income flows to the statement of retained earnings and is the starting point for the indirect method cash flow statement. Expense classifications tie back to the chart of accounts and ultimately to Schedule 125 on the T2.