Unit # 4 – The Income Statement

Where we are: 1.Journalize (Using the General Journal) – not yet 2.Post (To Ledger Accounts – which are also known as T- Accounts) – partially done 3.Trial Balance (Can enter on the Worksheet) - Done 4.Adjustments (On the worksheet) 5.Complete the Worksheet 6.Financial Statements (Income Statement - Now then the Balance Sheet - Done) 7.Closing Entries (Closing the Temporary Accounts – Drawings, Revenue, Expenses)

Unit # 4 – The Income Statement  Defining Profit & Loss Profit is an increase in Owner’s Equity that results from the successful operation of a business. Revenue is money received from sale of goods or services.  Goods for sale include: Cars, Cameras, Clothes, Furniture Etc.  Services for sale include: Transportation, Repairs, Hair Styling, Internet Access Etc.

Unit # 4 – The Income Statement  To sell goods (and earn Revenue) companies must spend money to operate the business.  Costs such as: Salaries, Advertising, Delivery, Utility Bills and many other things are called Expenses.

Unit # 4 – The Income Statement  Net Income (NI) is the preferred Accounting term for Profit.  The Formula for Net Income (NI) is a simple one: NI = Revenue – Expenses When Revenue is greater then expenses (R>E), companies realize a Net Income (or Profit) When Expenses are greater then Revenue (E>R), companies realize a Net Loss (or Loss)

Unit # 4 – The Income Statement  How do we show this? Using a Income Statement! Income statements occur at the end of a accounting period (monthly, quarterly etc)

Unit # 4 – The Income Statement  Step # 1 Prepare the Statement Heading  Step # 2 Prepare the Revenue Section  Step # 3 Prepare the Expenses Section  Step # 4 Determine Net Income or Net Income

Unit # 4 – The Income Statement (Page 136 of your textbook)

Unit # 4 – The Income Statement  New GAAP’s  Time Period Principle Requires the definition and use of the same period of time for the accounting period.  Each accounting period is the same length (ex. 1 month)

Unit # 4 – The Income Statement  New GAAP’s  Matching Principle States that the costs recorded as expenses should be “matched” with the revenue they help to generate during the same accounting period.

Unit # 4 – The Income Statement  Accrual Basis of Accounting A business that records revenue when earned and expenses when incurred. Revenue is recognized when earned, not necessary when the cash changes hands. Expenses are kept in separate accounts of the ledger. The transaction are recorded in whether they are cash or credit transactions

Unit # 4 – The Income Statement  Cash Basis of Accounting Recognizes revenue and expenses on a cash basis Expenses are only recorded when cash is paid for an expense. Revenue is only recorded when cash is received for sales. It does not conform to the Matching Principle, and therefore is not used by accountants for a business.