The Income Statement

BAF3M

RevenueAmounts of money earned from the sale of

goods or services during the routine operation of the business.

Revenue can be recorded from a promise of money (Accounts Receivable)

For example: Fees Earned, Service Revenue, Sales Revenue

ExpensesThe costs of items or services used up in the

routine operation of the business.

Can be recorded even if the business hasn’t paid for them yet (Accounts Payable)

For example: Salaries, wages, advertising expenses, delivery expenses

Net Income/Net LossNet Income is the difference between revenue and

expenses, when revenue is greater than expenses

Net Loss is the difference between revenue and expenses, when expenses are greater than revenues

Net Income is also referred to as PROFIT

For example:$500 (Revenue) - $400 (Expenses) = $100 (Net Income)$500 (Revenue) - $700 (Expenses) = ($200) (Net Loss)

Income StatementPresents the revenue, expenses, and net

income/loss for a specific period of time (an accounting period / fiscal period)

Beyonce’s DayCareIncome Statement

For the Year Ended December 31, 2012

RevenueBabysitting Fees Earned $250,000Total Revenue $250,000

ExpensesAdvertising 1,200Rent 12,000Salaries 60,000Supplies 350Utilities 15,000Total Expenses 88,550

Net Income $161,450

Step 1 – Statement Heading

A Three Line Heading is Used

WHO? – The name of the individual, business or other organization

WHAT? – The name of the financial statement (in this case, the income statement)

WHEN? – The period of time being measured by the income statementFor the (month, year, quarter) ended (date)Example: For the month ended March 31, 2013

Step 2 – Prepare Revenue Section

The largest Revenue item (stream) is listed first

Revenue is totalled in the left column and placed in the right column.

Step 3 – Prepare ExpensesExpenses are listed in Alphabetical order

Expenses are totalled in the left column and placed in the right column.

Step 4 - Find Net Income / Loss

Revenues – Expenses = Net Income (Net Loss)

Double Underline and add $

Beyonce’s DayCareIncome Statement

For the Year Ended December 31, 2012

RevenueBabysitting Fees Earned $250,000Total Revenue $250,000

ExpensesAdvertising 1,200Rent 12,000Salaries 60,000Supplies 350Utilities 15,000Total Expenses 88,550

Net Income $161,450

GAAP: Time Period Principle

Requires the definition and use of the same period of time for the accounting period / fiscal period.

Why? It is important for consistency purposes that

financial information can be measured and compared.

GAAP: Matching PrincipleStates that expenses should be recorded and

matched with the revenue they help to generate during the same accounting period.

This results in an accurate net income, because it reflects the business’ activities over the period.

Expenses are recorded when they are incurred, not when they are paid.

For example: If an expense was incurred, but not yet paid, an

expense is still recorded with an Accounts PayableDebit: Expense, Credit: Accounts Payable

GAAP: Revenue Recognition Principle

Revenues are recorded when they are EARNED, not when cash is paid.

For example: If a service was performed and no cash was paid,

the business will record an accounts receivable and a revenue

Debit: Accounts Receivable, Credit: Service Revenue

(Fees Earned)

ActivityRead pages 67-73

pg. 73, Ex 1,2, 4-6