5.2: The Income Statement

The income statement summarizes revenues and expenses. It also shows the difference between revenues and expenses: net income (profit) or net loss. The income statement is important because it shows how well a business is doing and allows business owners/managers to make decisions for the next year. Also, businesses are required to complete an income statement each year for income tax purposes. Income statements are prepared at the end of an accounting period or fiscal period. The fiscal period is the length of time in which earnings are measured. The length of a fiscal is always the same once the length has been decided by the business. It is usually a year and may not follow the calendar year. A common fiscal is April to March.

Let’s do an example using the information from page 133.

Revenue
Fees Earned / $
Operating Expenses
Advertising Expense / $
Car Expense
Rent Expense
Sundry Expense
Wages Expense
Total Expenses
Net Profit / $

Note: On an income statement, there are no lines like there are here (this just makes it easier to fill in the blanks). Also, like the example on page 128, sometimes you may have more than one source of revenue. In this case, you need to show your sources of revenues in the first column and then “total revenue” in the second column. A $ is attached to your first source of revenue. Lastly, revenues and expenses are listed alphabetically, the same as in your trial balance.

A chart of accounts is a list of the accounts in the ledger and their account numbers. They are listed in numerical order. Notice on page 131 how assets are assigned a number in the one-hundreds, liabilities in the two-hundreds, capital and drawings in the three-hundreds, and revenues and drawings in the four- to five-hundreds. Each business uses its own account numbering system, often using a four digit system instead. Each account receives a number for organizational and tracking purposes.

GAAP’s to record: The Time Period Concept, The Matching Principle

Assignment :p 134-136 Exercises #2 (trial balance & income statement), #5 a (income statement only)

*Hand-in electronically*