All you need to know about traditional income statement

By Nguyen Oanh
Published: 11/15/21
definition backgroundAll you need to know about traditional income statement

The income statement is an accounting document providing all the income and expenses of a company during an accounting year.

Traditional income statement or absorption costing income statement is one of the types of income statement figuring the detailed information of the financial health of the company.

But exactly what is a traditional income statement? What is it used for? How to calculate different types of value of income statements? What is the difference between the traditional income statements and contribution margin income statements?

Let’s discover all in this article!

What is a traditional income statement?

The absorption cost is a method of management accounting for capturing all the fixed costs associated with the manufacture of a particular product.

Companies prepare a traditional income statement for reporting to entities or persons outside the company. A traditional statement requires a company to record all of its overheads in record. This means that fixed costs associated with the manufacturing process, such as labor or materials, are counted in the cost of product inventories borne by the business.

When goods are sold, in a traditional income statement, the fixed costs associated with manufacturing the goods are transferred from the inventory costs of the company to the costs of the products sold by the company.

With a traditional income statement, a company's net income is calculated using both production costs and the amount of units sold by the company. A company's net income line is therefore affected by the amount of accounts it has of specific products during the period covered by a financial report.

Because of its approach, a traditional income statement can also be referred to as a full cost. In calculating variable costs, fixed production costs are not included in the cost of producing goods or services. Because the traditional income statement takes fixed manufacturing costs into account in calculating the cost of manufacturing products, it is viewed by some as a complete or more complete picture of the financial performance of the company.

Format of the traditional income statement

Here is the simplest format of the traditional income statement:

TRADITIONAL INCOME STATEMENT
Sales $ xxx
Less cost of goods sold $ xxx
Goods profit $ xxx
Less selling and administrative expenses $ xxx
Net profit (operating income) $ xxx

Sales - the cost of goods sold = good profit - selling and administrative expenses = net profit

Gross margin is an essential indicator of your income statement. Expressed in monetary units, gross margin represents the difference between the selling price and the cost of your products or services. The gross margin shows whether a particular activity is likely to generate income or not.

Example of the traditional income statement

Calculate the cost per uni

To calculate the cost per uni, all you need to do is divide the total amount by the amount of units. Usually, you have to calculate the cost per uni of direct materials, direct labor, variable overhead, and fixed overhead.

Calculate the sales

To calculate the sales, you multiply the cost and the amount of units:

Sales = Price per unit x total of units

For example, you sold 500 products and the price of each product is $10. So you have made 500 x $10 = $5000 of sales.

Calculate the cost of goods sold for the traditional income statement

To calculate the cost of goods sold, you multiply the cost per unit by the number of units sold (It’s the same cost per unit that we calculated previously):

Cost of goods sold = Cost per unit x the number of units sold

Calculate the gross profit

To calculate the gross profit, you subtract the cost of goods sold from the total sales that you made:

Gross profit = Sales - the cost of goods sold

Calculate the selling expense and the administrative expense

The selling expenses and administrative expenses mix also fixed and variable costs together:

Total of administrative expenses and selling expenses = Cost per unit x number of units sold + the fixed costs

Calculate the operating income

To calculate the operating income, you subtract the total of selling and administrative expenses from gross profit:

Operating income = Gross profit - the total of selling and administrative expenses

The difference between Traditional Income Statement Vs. Contribution Margin Income Statement

The contribution margin income statement is an alternative to the traditional income statement. The difference is that this profit and loss statement separates the variable and fixed expenses involved in running a business. Then, at the end of the contribution margin income statement, we can obtain the revenue after deducting or paying all the fixed and variable expenses and costs.

The format of the traditional income statement and the contribution income statements is also different. Compared to a traditional income statement, the expenses of the contribution margin income statement are divided according to the behavior of the fixed cost. It’s the expenses fixed instead of production costs.

Companies use the traditional income statements to establish external reporting while they use contribution margin income statements to analyze the performance of each category of product.

Transparency is an essential value for Appvizer. As a media, we strive to provide readers with useful quality content while allowing Appvizer to earn revenue from this content. Thus, we invite you to discover our compensation system.   Learn more
Definition backgroundWhy you should keep a fixed asset register on deck
Definition
December 31, 2021
Why you should keep a fixed asset register on deck
Why you should keep a fixed asset register on deck? This is just one of the question you may ask yourself about Fixed Assets Register, wanna find out the answers? check this article!
Tip backgroundGet transaction certainty with a debit note template
Tip
December 27, 2021
Get transaction certainty with a debit note template
Do you want to keep track of your debt obligations, but aren't sure of where and how to create the document that certifies your transactions? Then read this article to know more and if you stick around, you'll get a nice, free to download debit note template.
Definition backgroundFixed assets inventory: What’s the key difference
Definition
December 13, 2021
Fixed assets inventory: What’s the key difference
Fixed assets and inventory are very easy to be confused. So, what is the key difference between fixed assets and inventory? Discover what fixed assets inventory is, its importance, and the dissimilarity between these 2 notions in this article.
Tip backgroundA free credit note template and why you should care
Tip
December 9, 2021
A free credit note template and why you should care
A credit is always there to ensure that they were made and that both agreed to them. It is the black on white proof that one needs for the exchange of goods and services. If you want to know more, read the article and you'll even get rewarded with a free credit note template.
Definition backgroundA must-read of journal entries definition
Definition
December 9, 2021
A must-read of journal entries definition
It didn't happen until it was recorded and that is the importance of journal entries definition and why you should know about it in accounting for your business. Read more to find out more.
Tip backgroundWhy is a financial template useful?
Tip
December 7, 2021
Why is a financial template useful?
If you want a simple definition of a financial report and the purpose of a financial template, this article gives you a head start with a pre-made, modifiable financial report template.
Definition backgroundA simple definition of what you should know about pay in slip
Definition
November 30, 2021
A simple definition of what you should know about pay in slip
Bank deposits is a job in itself and pay in slip is even more difficult. This article is for you as it has the solution you need to know how, when and what to do with a pay in slip. You won't need to ask the bank teller.
Template backgroundA free cash flow statement template Excel to download
Template
November 29, 2021
A free cash flow statement template Excel to download
You're eager to know what a cash flow statement template Excel is and how to use one, then you've found the right article. Plus, you've lucked out as we've decided to include a free template for you to download.