Chapter 3 Unit 4 - Accounting The Income Statement

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Chapter 3 Unit 4 - AccountingThe Income Statement

• Mrs. Joudrey

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Purpose of Accounting

• Purpose of accounting to provide financial
  information that is used to make decisions

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What is Profit and Loss?

• Profit the increase in owners equity that
  results from the successful operations of a
  business.
• Loss decrease in owners equity happens when
  the business is not successful

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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

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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

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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

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Net Income

• Net Income is the term we use in accounting for
  profit.
• Net Income occurs when total revenue is greater
  than total expenses.

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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

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Net Loss

• Net Loss is the term we use in accounting for
  loss.
• Net Loss occurs when total expenses are greater
  than total revenue.

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• RevenuegtExpensesNet Income
• RevenueltExpenses Net Loss

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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).

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Heading Information

• Who? Goldmans 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

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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.

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Time-Period Principle

• Time-Period Principle same period of time must
  be used for the accounting period (ex. monthly,
  semi-annually etc.) you cant change the period
  of time between when you will put your financial
  statement out.

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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.

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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.

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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 didnt 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).

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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.

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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).

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Recording Expenses

• Expenses are the costs incurred to generate
  revenue
• Expenses are recorded as they are incurred
  (doesnt matter if they are cash or on credit)

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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.

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Example
Services performed and paid for in cash Services performed on credit Total Revenue to record
2000 2500 4500
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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.