Revenue
Expenses
Profit



Profit is the increase in the owner’s equity
that results from the successful operation of
a business
Revenue is amounts earned from the sale of
goods and services during the routine
operation of the business
Expenses are the cost of items or services
used up in the routine operation of the
business

Net income is the difference between revenue
and expenses when revenue is greater than
expenses
Revenue
Expenses
$500
$400
Net
Income
$100

Net income is the difference between revenue
and expenses when revenue is greater than
expenses
Revenue
Expenses
Net Loss
$500
$550
$(50)
The income
statement
presents the
revenue,
expenses, and
net income/loss
for a specific
period of time;
called an
accounting
period
Step One: Prepare Statement Heading
Line One:
Who?
Line Three:
When?
Line Two:
What?
Step Two: Prepare Revenue Section


The largest revenue item is usually listed first
The total is placed in the right column
Step Three: Prepare Expenses Section


Listed in the order they appear in the ledger
The total is also placed in the right column
Step Four: Determine Net Income or Net Loss

Double lines are ruled below the net income or net loss
Time-Period Principle:
 In order to compare different accounting
periods, it is important that the length of the
accounting period is consistent of time
 Examples: week, month, quarter, year
Matching Principle:
 It is important to include only revenue earned
during that period and only expenses
incurred during that period

The accrual basis of accounting matches
revenue earned with expenses incurred to
produce the revenue during the accounting
period
Recording Revenue


Revenue is recorded when it is earned even if cash
has not been received
When revenue is earned it increases owner’s equity
Cash
Sales
Sales on
Credit
Total
Revenue
$2000
$2500
$4500
Assets
Increase
Liabilities
Cash: $2000
No Change
A/R: $2500
Owner’s
Equity
Increases
$4500
Recording Expenses

Expenses are recorded as they are incurred
whether they are cash transactions or credit
transactions