The Income Statement

1
Chapter 3

• The Income Statement

2
Terminology

• Revenue is the money or promise of money received
  from sale of goods or services
• Expenses are the costs incurred to run a business
  (e.g., salaries, utilities, advertsing, etc.)
• Net Income Revenues - Expenses

3
Income Statement

• Summarizes the items of revenue and expenses
• Determines the net income or net loss for a
  stated period of time
• Accounting period may be a month, quarter (three
  months), six months, year or and regular period
  of time
• Fiscal period is a synonym for accounting period

4
Income Statement
at top of any column below any line
5
GAAP

• Time-Period Principle use of the same period of
  time for an accounting period
• Allows comparison of periods
• Matching Principle says expenses should be
  matched to the revenue they helped generate in
  the same period
• Expenses are recorded when incurred, whether paid
  in cash or on credit

6
GAAP

• Accrual Basis of Accounting record revenues when
  earned, expenses when incurred, regardless of
  cash
• Provides accurate picture of profits
• Cash Basis of Accounting record revenues when
  cash received and expenses when cash paid
• Ignores Matching Principle

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Debits and Credits

• Debits represent the left side of an account
• Debits increase all asset, expense and drawing
  accounts
• Credits represent the right side of an account
• Credits increase all liability, revenue and
  capital accounts

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Drawings

• Owner, Drawings is a separate account
• Represents withdrawals from the business by owner
• Provides information
• Similar to an expense with regards to
  debit/credit rules
• Increases shown on debit side

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The Big T Rules for Debits and Credits
DEBIT SIDE
CREDIT SIDE
10
Owners Equity

• Expanded on balance sheet to show more information

11
Statement Creation

• Trial Balance (taken from ledger)
• Income Statement
• Balance Sheet

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Trial Balance
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Report Form Balance Sheet