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 |