1. Preparing the Income Statement
Profit, Loss and the Income Statement

2. 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

3. 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

4. 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

5. 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)

6. 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

7. 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

8. 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

9. 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

10. 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

11. Simple Example

12. 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