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 who what when Indent one column Total here Double underline $ 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

7. 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

8. 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

9. The Big T… Rules for Debits and Credits DEBIT SIDE CREDIT SIDE

10. Owner’s Equity Expanded on balance sheet to show more information

11. Statement Creation Trial Balance (taken from ledger) Income Statement Balance Sheet

12. Trial Balance

13. Report Form Balance Sheet