INCOME STATEMENT OR ECONOMIC SUMMARY 1. Purpose of financial statentents.—The working sheet which was discussed in the two preceding chap ters reduces the trial balance of the ledger accounts to a set of figures which show, first, the amount of profit made by the business during the year under ex amination, and secondly, a list of the assets and lia bilities, as well as the proprietor's share in these as sets. In this chapter, the form and preparation of the income statement or economic summary will be treated.
The purpose of an income statement or economic summary is the classification of the information in such a form that it will be of service as an adminis trative aid. Every account included in the working sheet has been analyzed and its nature has been dis cussed. It was found that costs, for example, may be classified as pertaining to manufacturing, selling, administration, or deductions from income. It is proposed to discuss now the various means by which these items may be so classified as to show which branch of the business is most efficient, which most costly, which most profitable, and so on, as well as to show the various activities of each branch and the profit or loss on each.
2. Evolution of this end it will be ad visable to consider the various forms of income state ment or economic summaries which have been used, as well as those that are used now. The first thing to be considered in developing a form by which to record the economic progress of a business is the pur pose which this form must serve. The possible pur poses have already been discussed, but these pur poses must be considered in connection with the kind of business, the division of activities which is made, and the kind of information which is desired. For instance, some business houses will wish to examine their sources of income first, and their expenses after ward. Other houses, whose sales are practically fixed, and whose profits result chiefly from the de creases in expenses, will wish to examine first of all the various causes of expense, in order to ascertain whether they are unduly high, and how they compare with the conditions in previous years.
Little attention need be given to form, if only the amount of profit or of loss is to be ascertained. The mere listing of sources of income and causes of ex pense, with the consequent determination of the ex cess of the one over the other, will immediately indi cate the amount of profit made, or of loss incurred. Indeed, the working sheet which we have prepared furnishes this information without further trouble.
It may even be said that if the owner desires to know only the amount of profit or of loss at the end of the year, he does not need to carry all the accounts that have been described. He need have only one account, called "profit and loss," to which he should charge all expenses or losses, and credit all income. The difference between these will represent his profit or loss, as the case may be, just as truly as the bal ance of the economic-summary column in the working sheet represents one or the other.
However, as has been said, the functional classi fication of operating costs is as necessary to efficient operation, as it is to the accurate compilation of cost statistics. It is not enough for the owner to know the amount of profit or loss; he must know the sources of profit and the causes of expense. Moreover, he must classify such items to correspond either to the various departmental divisions of his business, or to the different operating functions. Then, instead of reckoning either total cost and total income, or indi vidual cost and individual income, he can measure the relative efficiency and the relative profitableness of such operations as manufacturing and selling, of such branches as the sales department and the advertising department, or of any branch to which he can assign a definite income and to which he can ascribe its own particular cost. For instance, a dry goods merchant may separate his sales into sales of various kinds of clothing and then allocate to each kind of sales the ex penses incurred in producing those sales.