| While the income statement itself is simple, many | | | | utilities expense. These accounts are easily |
| non-accountants lack a basic understanding of it | | | | recognized because they all share the same last |
| because the terms have come to mean many things | | | | name (Expense). |
| for them; that is, they aren't restricted to accounting | | | | 4. Other Expenses and Losses are also decreases in |
| only. | | | | owner's equity (capital or net worth) that arise from |
| What is the Income Statement? | | | | incidental activities non-crucial to the operation of a |
| The income statement is a financial statement that | | | | business. Examples: Loss on disposal of equipment, |
| measures the profits (or losses) of a business. It is | | | | and interest expense. |
| designed to measure the results of operations during | | | | 5. Cost Accounts --in a merchandising business-- are |
| a period of time. Therefore, we can say that the | | | | decreases in owner's equity that show the cost of |
| income statement will tell whether a business is | | | | the merchandise purchased. Examples of cost |
| profitable or not. | | | | accounts are: cost of goods sold, and purchases. |
| Components of the income statement: | | | | 6. Net Income is the excess of the revenues over |
| And we can enhance our understanding of this | | | | the expenses. For the public and the non-accountant, |
| statement by defining with precision 6 specific terms: | | | | net income is the profit, or as practical businessmen |
| 1. Revenues are increases in owner's equity (capital or | | | | call it: "The bottom line." Of course, when the |
| net worth). Revenues arise from either the | | | | expenses exceed the revenues, then we have a net |
| performance of a service or the sale of merchandise. | | | | loss. |
| Examples of accounts that appear in the Revenue | | | | Many companies present their income statement in a |
| section are: service revenue, ticket revenue, rent | | | | 'single step' form, a form that summarizes the |
| revenue, and sales. | | | | revenues and the expenses. A 'multiple-step' income |
| 2. Other Gains and Revenues are increases in owner's | | | | statement is more detailed and informative. |
| equity (capital or net worth) that arise from incidental | | | | The income statement is a dynamic statement, |
| activities; that is, activities that are secondary to the | | | | meaning that it shows the operations for a period of |
| main line of business. Examples: interest revenue, gain | | | | time. Thus, the heading will have a descriptive time |
| on disposal of equipment, and gain on sale of | | | | line in its heading; for example: 'For the Month (Year, |
| securities. We open a business with the intention of | | | | or Quarter) Ended August 31, 2010.' |
| providing a service or selling merchandise--not to | | | | One doesn't have to be an accountant to |
| make money from selling old equipment or earning | | | | understand, interpret, and communicate the results |
| interest in a savings account. | | | | that the statement presents. All it takes is a good |
| 3. Expenses are decreases in owner's equity (capital | | | | understanding of the language presented above. |
| or net worth). Expenses --also called operating | | | | If someone asks you, "What is an income |
| expenses-- arise in the course of generating | | | | statement?" After learning the above definitions, you |
| revenues through the performance of a services or | | | | should be able to give a good answer with |
| sale of merchandise. Examples of expense accounts | | | | confidence and poise. Try it. |
| are: rent expense, salaries expense, supplies expense, | | | | |