Chapter 3 Unit 4 - Accounting
The Income Statement
Mrs. Joudrey
Purpose of Accounting
• Purpose of accounting – to provide
financial information that is used to make
decisions
What is Profit and Loss?
• Profit – the increase in owner’s equity that
results from the successful operations of a
business.
• Loss – decrease in owner’s equity –
happens when the business is not
successful
Revenue
• Businesses sell goods (ex. cars) or
services (ex. haircuts)
• Revenue is the money the company will
get from the sale of a good or service.
– Money coming in
Expenses
• Expenses are the cost of items or services
needed to run the business (all the things
the business has to spend money on to be
able to sell the goods or services –
example: salaries, advertising etc.)
– Money going out
Example:
• A company sells a television for $500. The
business has to pay $400 to be able to sell
the television. Does this business make a
profit or loss? How much?
• Answer: ?
• The total revenue is greater than the total
expenses so there is a profit
Net Income
• Net Income is the term we use in
accounting for profit.
• Net Income occurs when total revenue is
greater than total expenses.
Example:
• A company sells haircuts for $50. The
business has to pay $55 to be able to sell
these haircuts. Does this business make a
profit or loss? How much?
• Answer: ?
• The total expenses are greater than the
total revenue so there is a loss
Net Loss
• Net Loss is the term we use in accounting
for loss.
• Net Loss occurs when total expenses are
greater than total revenue.
• Revenue>Expenses=Net Income
• Revenue<Expenses= Net Loss
Income Statement
• Income statements summarize the items
of revenue and expense to determine if
there is a net income or net loss for a
specific period of time (this period of time
is referred to as the accounting period –
the period of time covered by the financial
statements).
Heading Information
• Who? – Goldman’s Gym
• What? – Income Statement
• When? – For the month ended September
30, 2011-10-04
• Note: Balance sheets are prepared for a
specific date
• Income statements are prepared for a
period of time
Note the Following:
• Dollar signs at the beginning of each
column and at the final total
• Revenue section then space then
expenses
• Amounts are listed in the column closest
to the accounts – totals are in the far right
column.
• Difference between total revenue and total
expenses is the net income or net loss.
Time-Period Principle
• Time-Period Principle – same period of
time must be used for the accounting
period (ex. monthly, semi-annually etc.)
you can’t change the period of time
between when you will put your financial
statement out.
Matching Principle
• Matching Principle – costs recorded as
expenses must be matched with the
revenue they helped generate during the
same accounting period. This will give an
accurate net income/loss. Expenses are
recorded when the cost happened,
whether paid in cash or on credit.
Effects of an Error in Applying the
Matching Principle
• The chart below shows what could happen
if the expense of $2000 that should have
been recorded in July was recorded in
August.
Results of the Error
• If someone was looking at these statements they
would think that the company had a great month
in June (net income of 3000), but they didn’t
have a good month in July (net loss $1000). It
looks like the company is inconsistent and might
make some potential investors think twice if they
were planning on investing in this company.
However, if the company recorded everything
correctly, it would show that the company has
been consistent during June and July (Net
Income of 1000 each month).
Accrual Basis of Accounting
• Accrual Basis of Accounting – matches
revenue earned with expenses incurred
during the accounting period.
• A business that records revenue when
earned and expenses when incurred is
using the accrual basis of accounting.
Recording Revenue:
• Revenue is recorded when the service is
performed or when goods are shipped to a
customer (even if cash has not been
received).
Recording Expenses:
• Expenses are the costs incurred to
generate revenue
• Expenses are recorded as they are
incurred (doesn’t matter if they are cash or
on credit)
Example:
• During the first week of June, lawyer
Carmen Piccolo performed a variety of
services for clients. Some for the clients
paid cash for services totalling $2000. The
remainder of the clients were billed $2500
for the services. The total revenue
recorded for June was $4500 even though
only $2000 cash was received.
Example
Services
performed
and paid for
in cash
+ Services
performed on
credit
=
Total
Revenue
to record
2000
+ 2500
=
4500
Cash Basis of Accounting
• Cash basis of accounting is another
method to record expenses and revenue.
The cash basis of accounting is when
expenses are recorded only when the
cash is paid for an expense and revenue
is recorded only when cash is received.
This principle does not follow the matching
principle – for that reason the cash basis
of accounting is not used by accountants
for a business.