fa - income statement

8/6/2019 Fa - Income Statement

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THE TRIAL BALANCE

The Trial Balance is different from the other Financial Statements because it is the only one that lists all Accounts, the

Income Statement and the Balance Sheet split the Accounts and the Cash Flow Statement uses the same Accounts as

the Balance Sheet.

The Standard Trial Balance is straight forward and doesnt require any further explanation. It is a quick report that canbe printed or viewed to check the balance of specific accounts and to make sure that the books are in balance thatdebits = credits.

The Comparison Trial Balance is also straight forward and provides the same information as the standard version but itgives balances both by account and by accounting period. Time analysis is essential in managing and securingresources because it can quickly pinpoint changes that indicate errors or fraud as well as the unexpected changes thatmight require adjustments to cash planning and/or operations.

THE INCOME STATEMENT

One of the Principles of GAAP is the Matching Principle. Matching requires that when you post sales into thesystem for an accounting period (month), you must also post the costs of the products or services you sold duringthat period in the same accounting period (month).

The Income Statement, also called the P&L or Profit and Loss Statement, is a Current Year statement, it does

not cross years. The Income Statement provides cumulative To Date financial data for the current business(Fiscal) year. So, the March Income Statement shows the totals for January, February and March together in onecolumn and the totals for the previous December would not be part of the totals for that column.

The Income Statement Accounting Types are Revenue, Cost of Goods Sold and Expenses. The Accounts thatare not on the Income Statement are on the Balance Sheet.

The format for the Income Statement is:

Revenue- Cost of Goods Sold

-=Gross Margin

- Expenses-

=Operating Income

+ Other Revenue- Other Expenses-

=Net Income

The Income Statement uses intermediate steps to reach Net Income. The first of these steps is Gross Margin.Gross Margin = Revenue - Cost of Goods Sold and represents the amount of revenue that is left after costs tocover operating expenses. Gross Margin is meaningful because it shows the direct relationship between thecosts of products or services and their sales.

The Gross Margin % can be compared to industry standards to make sure your pricing and costs are competitive.It is calculated as:

y Gross Margin = Revenue - Cost of Goods Soldy Gross Margin % = Gross Margin ($) / Revenue

The next intermediate step towards Net Income is Operating Income. Operating Income = Gross Margin -Expenses and is the amount of profit (income) from normal (usual) operations.


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The final step in calculating Net Income is to add the amounts for the Accounts categorized as Other Revenueand to subtract the amounts for the Accounts categorized as Other Expenses. Other Revenues include anymoney in (gain) that is not received from the sale of the usual business products or services, this might be again on the sale of an asset like a vehicle. Other Expenses include any money out (loss or expense) that is notpart of the usual expenses or cost of goods sold. Other Expenses might include some interest charges or a losson the sale of an asset.

Net Income is the amount of revenue that was not spent on operations, it represents the amount of the increase

in overall value. Remember not to confuse the terms Revenue or Income with Cash. The Net Income amounthere is $45,600 and if you check the Trial Balance from the previous post, the Checking Account Balance is$44,350.

Net Income is the amount of revenue that was not spent on operations, it represents the amount of the increasein overall value. Remember not to confuse the terms Revenue or Income with Cash.

Lets look at the Income Statement again in terms of debits and credits.

AccountDescription Debits Credits

4000 Sales $50,0007000 Rent $3,000

7020 Office Supplies $1507040 Subscriptions $3007060 Utilities $1257100 Fuel $2757200 Repairs and Maintenance $5007300 Credit Card Interest and Fees $50

Totals $4,400 $50,000

Remember from the Trial Balance report which shows all accounts and their balances that the total debitamounts were equal to the total credit amounts. The Income Statement splits the accounts with the BalanceSheet and so the total debits and total credits on each of these statements will not be equal, but the debits andcredits of their combined accounts are equal. So, lets take a look at the Accounts that are not listed on theIncome Statement.

AccountDescription Debits Credits

1000 Checking Account $44,3501200 Accounts Receivable $01500 Office Equipment $1,3001520 Office Furniture $1,6502000 Accounts Payable $1,700

Totals $47,300 $1,700

The difference between the balances of the Income Statement Accounts, $45,600, is equal to the differencebetween the Balance Sheet Account balances. This listing of the Balance Sheet Accounts shows where the NetIncome went. $47,300 increase in assets - money still due $1,700 = $45,600 = Net Income of $45,600.

The Income Statement Accounts accumulate their balances throughout the fiscal year and at the end of the year,the accounts are reset to zero (closed out) and the difference between their total debits and total credits (NetIncome) is transferred to the Balance Sheet. The Balance Sheet account used in the transaction is an Equityaccount and is either Retained Earnings or Owners Capital depending on the structure of the business.


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