Chapter 3

The Income Statement

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

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

Income Statement

Revenue $2100

Expenses:

Office Supplies $240

Software 850

Postage 50

Gas 375General 20 1535

Net Income $565

W. Puma Tutoring CompanyIncome Statement

Three months ended March 31, 2004

whowhatwhen

Indent one column

Total here

Double underline

$ at top of any column & below any line

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

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

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

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

The Big T… Rules for Debits and Credits

DEBIT SIDE CREDIT SIDE

Owner’s Equity

• Expanded on balance sheet to show more information

Owner's EquityA. Service, Capital 27,642.00$ Add: Net income (loss) 29,010.00$ Less: Drawings 34,200.00 Increase (decrease) in Equity (5,190) 22,452.00 Total Liabilities and Equity 50,602.00$

Statement Creation

Trial Balance (taken from ledger)

Income Statement

Balance Sheet

Trial Balance

Dr Cr8,952.00$

7,500.00

2,900.00

4,800.00

16,850.00

13,200.00

2,000.00$

22,150.00

31,642.00

34,200.00

84,578.00

360.00

6,500.00

1,350.00

680.00

11,000.00

2,415.00

29,663.00

140,370.00$ 140,370.00$

Telephone Expense

Wages Expense

Sammer ServicesTrial Balance

December 31, 2005

Car Expense

Interest Expense

Miscellaneous Expense

Rent Expense

A. Sammer, Capital

A. Sammer, Drawings

Revenue

Bank Charges

Furniture and Equipment

Automobile

Accounts Payable

Bank Loan

Cash

Accounts Receivable

Supplies

Prepaid Insurance

Report Form Balance SheetService Company

Balance SheetDecember 31, 2002

ASSETSCash 8,952.00$ Accounts Receivable 7,500.00 Supplies 1,500.00 Prepaid Insurance 4,600.00 Furniture and Equipment 16,050.00Automobile 12,000.00Total Assets 50,602.00$

LIABILITIES and EQUITYLiabilitiesAccounts Payable 6,000.00$ Bank Loan 22,150.00 28,150.00$ Owner's EquityA. Service, Capital 27,642.00$ Add: Net income (loss) 29,010.00$ Less: Drawings 34,200.00 Increase (decrease) in Equity (5,190) 22,452.00 Total Liabilities and Equity 50,602.00$