Preparing the Income Statement Profit, Loss and the Income Statement

Reviewing Profit and Loss Profit is the increase in owner’s equity that results from the successful operation of a business Loss is the opposite of profit, when a company loses money and owner’s equity goes down Profit, or making money, is the main goal of every business

What is Revenue? Revenue is the sole purpose for every business to operate Money, or the promise of money, received from the sale of goods or services is called revenue It can be made both from selling products/ goods or selling services

What are Expenses? Have you ever heard the phrase, “You have to spend money to make money”? This refers to expenses To sell goods and services, money is spent to operate the business These can include salaries, advertising, delivery, rent, and utilities are all included in the expense category

Revenue – Expenses = Net Income Calculating Profit When revenue (the money we make) is greater than expenses (the money we spend), the business makes a profit In accounting, we call this profit Net Income The equation to figure out Net Income is: Revenue – Expenses = Net Income If expenses are larger than revenue, a company has a Net Loss (they lose money)

The Income Statement An Income Statement shows readers how much money the business has made or lost by summarizing the items of revenue and expense for a period of time This period of time is known as the accounting period This period can be a day, week, month, quarter, or year

Four Ways to Impact Equity BUSINESS ACTIONS OWNERS ACTIONS Revenue Capital Assets generated by business activities (sales) Investment by owner Drawings Expenses Withdrawal by owner Assets consumed by the business when generating revenue This is the Income Statement

Classification of Revenues Sales Represent revenues from the sale of goods. Service Revenue Represent revenues from the provision of services Other Revenues Interest on investments or excess cash. Other revenues, not related to the “core” or main activities of the business Always listed in alphabetical order

Classification of Operating Expenses Groupings Operating expenses are generally grouped by common activity Salaries & Wages Delivery expenses Cost of Goods Sold Rent Insurance Order Always alphabetic

The Heading The heading always follows this order Who What When Also, the date is not a single date, but rather for a time period For the Month Ended December 31, 2011

Simple Example

Your Turn You are going to forecast what your income statement is going to look like, 1 year after starting your business Steps Think of the different ways you will make money (revenue) and their amounts Think of the different ways you will need to spend money (expenses) and the amounts Place these numbers appropriately in the provided template