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Chapter 5

Chapter 5. The Income Statement. Terminology. Revenue is the money or promise of money received from sale of goods or services Expenses are the costs incurred to run a business (e.g., salaries, utilities, advertsing, etc.)

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Chapter 5

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  1. Chapter 5 The Income Statement

  2. Terminology • Revenue is the money or promise of money received from sale of goods or services • Expenses are the costs incurred to run a business (e.g., salaries, utilities, advertsing, etc.) • Revenues - Expenses=Net Income (Net Loss when Expenses exceed Revenue )

  3. Income Statement • Summarizes the items of revenue and expenses • Determines the net income or net loss for a stated period of time • Accounting period may be a month, quarter (three months), six months, a year • Fiscal period is a synonym for accounting period

  4. who what when Indent one column Total here Double underline Income Statement Fees Earned $ at top of any column & below any line

  5. Chart of Accounts • List of ledger accounts by name and number • Numbers save time and increase accuracy • Sample numbering system: 100-199 Assets 200-299 Liabilities 300-399 Owner Equity 400-499 Revenue 500-599 Expenses

  6. GAAP • Time-Period Principle use of the same period of time for an accounting period • Allows comparison of periods • Matching Principle says expenses should be matched to the revenue they helped generate in the same period • Expenses are recorded when incurred, whether paid in cash or on credit

  7. Accrual Basis of Accounting: record revenues when earned, expenses when incurred, regardless of cash • Provides accurate picture of profits • Cash Basis of Accounting: record revenues when cash received and expenses when cash paid • Ignores Matching Principle

  8. Debits and Credits • Debits represent the left side of an account • Debits increase all asset, expense and drawing accounts • Credits represent the right side of an account • Credits increase all liability, revenue and capital accounts

  9. Drawings • Owner, Drawings is a separate account • Represents withdrawals from the business by owner • Provides information • Similar to an expense with regards to debit/credit rules • Increases shown on debit side

  10. Liabilities Assets + + + + Owner's Equity Owner, Capital + + + Revenues Expenses Owner, Drawings The Big T… Rules for Debits and Credits DEBIT SIDE CREDIT SIDE

  11. Owner’s Equity • Expanded on balance sheet to show more information Owner’s Equity E. Boa, Capital Balance Jan 1 $21878 Add: Net Income $8209 Less: Drawings 3950 Increase in Capital 4259 Balance Jan 31 26137 Total Liabilities & Owner’s Equity $32677

  12. Statement Creation Trial Balance (taken from ledger) Income Statement Balance Sheet

  13. Trial Balance

  14. Report Form Balance Sheet

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