This page describes the accounts on income statement.
It emphasizes understanding the meaning of accounts rather than specialized accounting knowledge.
- Income Statement
- It is described ‘損益計算書’, and called ‘son eki keisan syo’, in Japan.
Income statement is a financial statement that records the income and costs of a company that has been realized for a certain period.
The structure of the income statement is easy to understand if it is divided into three stages
First, operating income is calculated by deducting the costs in order from net sales.
This part consists of income and costs related to the main business, and the total is the operating income, which is the profit obtained from the main business.
The main business here means the business defined as the purpose of the business in the articles of incorporation.
Next, profits and losses other than the main business are adjusted to obtain net income before taxes.
Profits and losses other than the main business are classified into non-operating income and loss and extraordinary income and loss.
Non-operating income / loss and extraordinary income / loss depend on whether the profit or loss is ordinary or extraordinary.
Finally, the accounting tax amount is adjusted with respect to net income before taxes to obtain the net income.
Figure 2-1 (c) shows the outline of the income statement.
The actual income statement contains the names of profits other than those shown in the figure.
Details will be described below.
In the income statement of the Japanese GAAP, the profit and loss of a business is divided into profit and loss from the main business, ordinary profit and loss from other than the main business, and extraordinary profit and loss from other than the main business.
The result of profit or loss from the main business is operating income.
The sum of operating income and ordinary profit or loss from other than the main business is called ordinary income.
Then, the sum of the ordinary income and the extraordinary profit and loss from other than the main business is the net income before taxes.
On the other hand, the IFRS income statement is divided into operating profit and loss and financial profit and loss.
And, except for the profit and loss related to financial transactions, everything is included in the operating profit and loss.
In the Japanese GAAP income statement of companies whose main business is not finance, financial profit and loss is included in non-operating income / loss or extraordinary income / loss.
On the other hand, non-operating income / loss and extraordinary income / loss include items other than financial profit and loss.
Under IFRS, only profits and losses related to financial transactions are extracted as financial profit and loss, and all other profits and losses are included in operating profit and loss.
That is, IFRS operating profit and loss includes non-operating income / loss and extraordinary income / losses, other than financial profit and loss in addition to operating income under Japanese GAAP.
Therefore, the operating income under Japanese GAAP and the operating profit / loss under IFRS are different.
Even in IFRS, if the operating profit is positive, it is often described as operating income, but the items included are different from the operating income of Japanese GAAP.
Figure 2-3-1 (a) shows the overview about the differences between the income statement under Japanese GAAP and IFRS.
In addition, in IFRS, the notation of operating income is not compulsory, and it may not be stated as operating income.
If the operating profit is not explicitly stated, the reader must calculate the operating profit by himself.
The rules about amortization of goodwill also differ between Japanese GAAP and IFRS.
Under Japanese GAAP, goodwill is amortized evenly, so a portion of it is treated as an cost each year.
On the other hand, in IFRS, according to the impairment test, if there is no problem, it does not appear in the income statement, and if there is a problem, it is treated as an impairment.
Therefore, not only the items of operating profit and loss are different between the Japanese GAAP and the IFRS income statement, but also the profit and loss items included in net income before taxes are different.
This section describes the accounts included in the income statement by GAAP in Japan.
Therefore, the items to be explained include profits and losses such as non-operating income and loss and extraordinary income and losses, or profits that are not described overseas such as ordinary income.
In the income statement prepared by Japanese GAAP, profit and loss from the main business and profit and loss from other than the main business are separated.
In the upper part of income statement, operating income is calculated from the revenue and costs from the main business.
- Operating revenue
- It is described ‘営業収益’, and called ‘eigyou syuueki’, in Japan.
- Net sales
- It is described ‘売上高’, and called ‘uriage daka’, in Japan.
Operating revenue is the revenue earned by the main business of the company, which is listed at the top of the income statement.
The terms that appear at the top of the income statement vary depending on the industry and company, such as net sales, ordinary income, service income, and income.
However, in all case, the top of the income statement is the income earned from the main business.
Hereinafter, net sales will be used as a notation of this operating revenue.
By the way, the income from individual transactions is called sales, and when the sales are summed at the closing, it is called net sales.
Whether or not it is a main business depends on whether or not the company describes it as a business purpose in the articles of incorporation.
The only way a company can make a profit is to increase its profits or reduce its costs.
Net sales is the most important income earned from the main business.
- Cost of sales (COS)
- It is described ‘売上原価’, and called ‘uriage genka’, in Japan.
Cost of sales is the cost directly required for purchasing or manufacturing when the company provide goods, products or services.
The income statement describes the cost of sales corresponding to the sales in the accounting period.
Cost of sales is expressed by the following equation.
COS = Beginning merchandise inventory + Cost of purchased goods − Ending merchandise inventory (retail bussiness)
COS = Beginning finished goods inventory + Cost of products manufactured − Ending finished goods inventory (manufacturing industry)
Merchandise is an item that is sold without being processed after purchase, and product is an item that is processed and sold from the purchased material.
The inventory of merchandise / products is the stock of unsold merchandise / products.
Although the description of the formula differs since the purchasing-selling process differs depending on the industry, the basic idea is the same.
In the retail industry, merchandise inventory is accumulated by the cost of purchased goods, and in the manufacturing industry, the finished goods inventory is accumulated by the cost of products manufactured.
Therefore, in the following, these are referred to as costs without distinguishing between merchandise and products.
In addition, In addition, both stocks are referred to as inventory.
COS = Beginning inventory + Current cost − Ending inventory
Beginning inventory : Amount of inventory at the beginning of the period
Current cost : Costs required for purchasing and manufacturing in the current period
Ending inventory : Amount of inventory at the end of the period
The beginning inventory is the amount of inventory at the beginning of the period, which means the cost required for past purchase / manufacturing.
The sum of that and the current cost is the cost required for purchasing / manufacturing by the end of the current period.
Then, when the amount of inventory remaining at the end of the period is subtracted from that amount, the cost of the merchandise / products sold in the current period remains.
The cost of merchandise / products sold in the current period is the cost of sales in the current period.
In corporate accounting, there is a rule of the principle of matching cost with revenue, and cost corresponding to sales are to be recorded.
The cost of sales formula follows that rule.
The concept of cost of sales is shown in Figure 2-3-1 (b).
The difference between the retail industry and the manufacturing industry lies in the ‘cost of purchased goods’ and ‘cost of products manufactured’, which are the basis of the cost of sales.
Cost of purchased goods is simply the accumulation of the purchase price of the merchandise.
On the other hand, cost of products manufactured include various costs such as labor costs and depreciation costs.
The cost of merchandise, products, and services is referred to by different names depending on the industry, but in each case, the cost of sales is the cost related to sales.
Therefore, the cost of sales is linked to the sales.
- Gross profit
- It is described ‘売上総利益’, and called ‘uriage sou rieki’, in Japan.
Gross profit is the profit obtained from the merchandise / product / service itself, which is the sales minus the cost of sales.
If the profit is negative, it is called gross loss.
Gross profit = Net sales − Cost of sales
Gross profit divided by net sales is called gross profit margin.
A high gross profit margin means that the difference between net sales and cost of sales is large,
and it can be interpreted that the added value of merchandise, products, and services is high, or the efficiency of purchasing and manufacturing is high.
Gross profit margin = Gross profitNet sales = 1 − Cost of salesNet sales
Gross profit margin is often used as an indicator to compare companies in the same industry, as each industry has its unique business environment.
- Selling, general and administrative expenses (SG & A)
- It is described ‘販売費及び一般管理費 (販管費)’, and called ‘hanbai hi oyobi ippan kanri hi (hankanhi)’, in Japan.
Selling expenses are the costs directly required to sell products or provide services.
For example, personnel expenses, traveling and transportation expenses, agent fee, advertising expenses, etc. in the sales department correspond to selling expenses.
General and administrative expenses are expenses required for general and administrative operations other than manufacturing and sales.
For example, personnel expenses, traveling and transportation expenses, office rent, utilities expenses, etc. in the indirect department correspond to general administrative expenses.
The total of Selling expenses and General and administrative expenses is selling, general and administrative expenses (hereinafter referred to as SG & A).
SG & A are the costs required to operate a business, which are distinguished from expenses directly related to marchandise, products and services included in cost of sales.
While cost of sales is the cost linked to net sales, SG & A are not significantly linked to net sales because general and administrative expenses include many fixed costs.
- Operating income
- It is described ‘営業利益’, and called ‘eigyou rieki’, in Japan.
Operating income is the profit obtained from the main business, which is gross profit minus SG & A.
Main business means the business whose business purpose is stipulated in the articles of incorporation.
If the profit or loss is negative, it is called an operating loss.
Operating income = gross profit − SG & A = Net sales − (Cost of sales + SG & A)
Operating income is the most important profit in judging the state of a company's main business.
By checking the past changes in operating income, you can see whether your main business is growing.
The ratio of operating income divided by net sales is called the operating profit margin
Operating profit margin = Operating incomeNet sales = 1 − Cost of sales + SG & ANet sales
A high operating profit margin means that the cost of sales or SG & A are small compared to the net sales, and it can be interpreted that the production/ purchasing efficiency is high or the sales / operation efficiency is high.
Therefore, it is used as an indicator to measure the soundness of business and the competitiveness of companies.
In the income statement by Japanese GAAP, operating profit is followed by profits and losses from other than the main business.
Net income before taxes is calculated by adding profits and losses other than the main business to operating income.
- Non-operating income and loss
- It is described ‘営業外損益’, and called ‘eigyou gai soneki’, in Japan.
Non-operating income and loss is ordinary profit and loss that generate outside the company's main business.
The difference between non-operating income and non-operating expenses is the non-operating income and loss.
Other than the main business means that the business is not specified as a business purpose in the articles of incorporation.
Non-operating income and loss = Non-operating income − Non-operating expenses
The expression non-operating income does not appear in the income statement.
In the income statement, non-operating income is added to operating income, non-operating expenses are deducted, to calculate the ordinary income.
Non-operating income includes interest income, dividends income, real estate rent, foreign exchange gains, gains on sales of securities, etc.
Non-operating expenses include interest expense, foreign exchange losses, sales discounts, loss on sale of securities, and so on.
Most non-operating income often comes from financial management and side businesses.
On the other hand, non-operating expenses include expenses necessary for business, such as interest on borrowing and amortization of business commencement expenses.
Non-operating income / loss is distinguished from extraordinary gains / losses in that it is a continuous profit / loss among the profit / loss other than the main business of the company.
- Interest income
- It is described ‘受取利息’, and called ‘uketori risoku’, in Japan.
Interest income is interest earned from deposits, loans, or securities such as bonds.
- Dividends income
- It is described ‘受取配当金’, and called ‘uketori haitoukin’, in Japan.
Dividends income is dividends from stocks or investment trusts.
- Foreign exchange gains and losses
- It is described ‘為替差損益’, and called ‘kawase sa soneki’, in Japan.
Foreign exchange gains / losses are profits / losses caused by fluctuations in exchange rates.
Foreign exchange gains / losses include settlement gains / losses and conversion gains / losses.
Settlement gains / losses is the profit / loss that occurs because the exchange rate differs depending on the timing of settlement of receivables / debts.
Conversion gains / losses is the profit / loss that occurs because the yen-converted amount of assets / liabilities differs depending on the exchange rate at the transaction and at the settlement.
Foreign exchange gains and losses on the income statement is the settlement gains / losses when a Japanese company have transaction with a foreign company, or the conversion gains / losses when it has foreign assets.
By the way, there is a foreign currency translation adjustment on the balance sheet as a account with similar name.
but this is the account that adjusts the exchange rate defference used for the evaluation of overseas subsidiaries in the consolidated financial statements.
If both ‘foreign exchange gains’ and ‘foreign exchange losses’ occur at the closing, they are offset and one of them is recorded in the income statement as non-operating income or non-operating expenses.
- Other
- It is described ‘その他’, and called ‘sono ta’, in Japan.
Other are a collection of less important profits and losses that are not required to be stated in the accounting rules.
- Interest expenses
- It is described ‘支払利息’, and called ‘shiharai risoku’, in Japan.
Interest expenses is interest paid on borrowings from financial institutions and issued corporate bonds.
- Amortization of business commencement expenses
- It is described ‘開業費償却’, and called ‘kaigyou hi syoukyaku’, in Japan.
Business commencement expenses is the cost for preparing for opening, which is spent from the establishment of the company to the start of business.
Business commencement expenses is essentially deferred asset and are initially treated as an asset account.
After that, the amortized amount of the business commencement expenses of the deferred asset is recorded as the amortization of business commencement expenses in the income statement.
In accounting, it is supposed to be amortized evenly over 5 years, but under tax law, it can be amortized voluntarily.
Therefore, many companies adopt tax law rules, and they are treated as expenses to virtually reduce profits.
- Ordinary income
- It is described ‘経常利益’, and called ‘keijyou rieki’, in Japan.
Ordinary income is the sum of the operating income which is profit and loss of the main business and the non-operating income and loss which is ordinary profit and loss from other than the main business.
It is the profit obtained from the entire business including financial activities in addition to normal sales activities.
If it is negative, it is called ordinary loss.
Ordinary income = Operating income + Non-operating income and loss
Ordinary income is an expression based on Japanese GAAP, and it is not described in the income statement for companies that have applied IFRS.
Under IFRS, non-operating income and loss other than financial transactions are included in operating income under names such as other income and other expenses.
And accounts related to financial transactions are described particularly as finance income and finance costs.
- Extraordinary gains and losses
- It is described ‘特別損益’, and called ‘tokubetsu soneki’, in Japan.
Extraordinary gains / losses are profits / losses that occurs temporarily among the profits / losses other than the main business of the company.
Extraordinary income and loss may not always occur.
The expression extraordinary gain or loss does not appear in the income statement.
In the income statement, net income before taxes is calculated by adding extraordinary income and extraordinary loss to ordinary income.
Specific examples of extraordinary income and loss are as follows.
- Extraordinary income
- Gain on sales of noncurrent assets, Gain on sales of investment securities, Gain on sales of subsidiaries' stocks, etc.
- Extraordinary loss
- Loss on sales of noncurrent assets, Loss on sales of investment securities, Impairment loss, Loss on disaster, etc.
Extraordinary losses are extraordinary losses other than the main business, but are often large in amount in relation to important management problem.
Extraordinary gains and losses are presented based on Japanese GAAP and are not described in the income statement for companies that have applied IFRS.
In the IFRS income statement, only accounts related to the financial balance are listed under operating profit, and profits and losses other than the financial balance are included in the upper part of operating profit as other income and other expenses.
Therefore, expenses that have been recorded as extraordinary losses under Japanese GAAP, such as business structure improvement expenses , will push down operating income under IFRS.
- Gain and loss, on sales of noncurrent assets
- It is described ‘固定資産売却損益’, and called ‘kotei shisan baikyaku son eki’, in Japan.
Gain / loss on sales of noncurrent assets is gain / loss that occur when fixed assets (land, buildings, vehicles, machinery, etc.) are sold.
The difference between the sale price and the book value is the gain or loss on sale.
- Gain and loss, on sales of investment securities
- It is described ‘投資有価証券売却損益’, and called ‘toushi yuuka syouken baikyaku son eki’, in Japan.
Gain / loss on sales of investment securities is gain / loss that occur when securities included in investments and other assets are sold.
Specifically, it is the profit or loss from the sale of securities that are not for resale, stocks of affiliated companies, etc.
The difference between the sale price and the book value is the gain or loss on sale.
By the way, the gain / loss on sale of trading securities is included in non-operating profit / loss as “gain / loss on sales of securities”.
- Impairment loss
- It is described ‘減損損失’, and called ‘genson sonshitsu’, in Japan.
Impairment is the devaluation of an asset when the profitability of the asset declines and become no longer commensurate with the book value.
Impairment loss is the loss recorded in the income statement due to impairment.
Tangible fixed assets such as land and buildings and intangible fixed assets such as intellectual property rights and goodwill are subject to impairment.
The amount of impairment loss is the defference between book value and recoverable amount.
As the recoverable amount, the value in use is usually adopted, which is discounted present value of cash flows obtained from the asset in the future.
- Income before income taxes (Net income before taxes)
- It is described ‘税金等調整前純利益’, and called ‘zeikin tou tyousei mae jyun rieki’, in Japan.
The total amount of all income and expenses before deducting income taxes is the net income before taxes.
If the income is negative, it is called net loss before taxes.
Depending on the timing of filing the financial statements, it may be written as quarterly net income before taxes or for the year net income before taxes.
Taxable income is calculated based on this net income before taxes, and income taxes will be levied on the company.
Note that, this account is generally described as income before income taxes in the Japanese income statement, but this website uses the notation net income before taxes.
In the lower part of the income statement, tax relaated account is added to or subtracted from the net income before taxes to obtain the net income.
The difference between net income and net income before taxes is devised so that the tax amount is suitable for the profit, not the tax amount actually paid.
- Corporate tax, inhabitant tax and business tax (Income taxes-current)
- It is described ‘法人税、住民税及び事業税’, and called ‘houzin zei, jyuumin zei, oyobi zigyou zei’, in Japan.
Income taxes-current is expressions of tax on the income statement.
Income taxes is taxed on taxable income under the tax law, not on net income before taxes which is an accounting profit, as shown in Figure 2-3-1 (c).
Therefore, in income statement, the tax rate on net income before taxes varies from year to year, even for the same company.
The reason why income taxes-current are ‘expressions of tax’ is that there are more than three taxes actually levied, as shown in the list below.
- Corporate tax
- It is the national tax levied on corporate income. If the capital is over 100 million yen, it will be 23.2% (at 2022).
- Corporate inhabitant tax
- It is the local tax paid to the local government imposed on the whereabouts of a corporation.
- Business tax
- It is the local tax levied on corporate income.
- Local corporation tax
- It is the tax to reduce the ubiquity of tax revenue between regions by collecting a part of the local tax and redistributing it to the regions.
- Special business tax
- It is the tax to reduce the ubiquity of tax revenue between regions by collecting a part of the local tax and redistributing it to the regions.
That is, there are three national taxes (corporate tax, local corporation tax, and special business tax) and two local taxes (corporate inhabitant tax and business tax) at 2022 as taxes included in income taxes-current.
However, although the number of taxes is more than three, it does not mean that the tax amount has increased.
Of the above taxes, business tax and special business tax are included in the deduction, so the actual burden rate (effective tax rate) is lower than the official tax rate.
Specifically, the effective tax rate as of 2022 is about 30%.
- Income taxes-deferred
- It is described ‘法人税等調整額’, and called ‘houzin zei tou tyousei gaku’, in Japan.
Income taxes-deferred is a number for suitably communicating business conditions by adjusting the difference between net income before taxes as the accounting profit and the taxable income under the tax law.
In other words, it is an accounting technique that shows as if the tax is linked to net income before taxes.
Generally, a company prepares an income statement according to the rules of corporate accounting.
However, net income before taxes usually does not match taxable income.
The reason is that net income before taxes is calculated by income and expense, while income under tax law is calculated by gross profits and deductible expenses.
The main part that causes this difference in recognition is called temporary difference which these recognition eventually match.
Temporary defference is described in the deferred assets for tax purposes section.
Income taxes-deferred is a technique that shows as if the company will not pay taxes on this temporary difference, even though the company will actually pay taxes based on the tax law.
Specifically, income taxes-deferred is calculated by multiplying the temporary difference by the effective tax rate, and the deferred assets for tax purposes on the balance sheet are adjusted as to match it.
As a result, it looks like as if the tax corresponding to net income before taxes has been levied on the income statement.
- Net income
- It is described ‘純利益’, and called ‘jyun rieki’, in Japan.
Net income is the profit obtained by subtracting all expenses and income taxes including income taxes-deferred from all income in in the accounting period to be calculated.
If the profit or loss is negative, it is called a net loss.
Net income is the final profit that a company earns during its accounting period, and it is the profit attributable to shareholders.
Net income is the source of dividends and retained earnings.
The ratio of net income distributed as dividends is called the dividend ratio, and shareholders can obtain dividends from the total dividend depending on the number of shares.
Retained earnings are used for business expansion and affect future stock prices.
Therefore, net income is the profit that shareholders pay the most attention to.
By the way, depending on the type of business, the timing of earnings may be seasonal, and even if the profit or loss is positive for the year, it may be negative for each quarter.
Also, for a company with a long purchase-to-sale cycle, net income can be negative depending on the timing, even though the business is steady.
Therefore, it is better to check not only the latest net income stated in the financial statements but also the past changes in net income from the securities report or the company's website.
- Net income attributable to shareholders of the parent
- It is described ‘親会社株主に帰属する純利益’, and called ‘oya gaisya kabunushi ni kizoku suru jyun rieki’, in Japan.
- Net income attributable to non-controlling interests
- It is described ‘非支配株主に帰属する純利益’, and called ‘hi shihai kabunushi ni kizoku suru jyun rieki’, in Japan.
non-controlling interests are shareholders of a subsidiary other than the parent company.
Net income attributable to non-controlling interests is the net income of a subsidiary that does not attribute to the parent company.
If it is not a wholly owned subsidiary, the subsidiary has non-controlling interests and their profits must be separated from the profits of the parent company.
The profit excluding the net profit attributable to non-controlling interests is the net profit attributable to the shareholders of the parent.
The fact that the profit or loss attributable to non-controlling interests is negative means that there is a subsidiary whose final profit is net loss.
net income attributable to shareholders of the parent is absorpt into retained earnings on the consolidated balance sheet.
Non-controlling interests are usually small and therefore of little concern.
but for the shareholders of the parent company, the true net income is this ‘Net income attributable to shareholders of the parent’.