This document discusses key concepts related to the income statement, including revenues, expenses, and net income. It defines revenues as inflows from sales of goods and services, and expenses as outflows used to generate revenues. The net income is the amount revenues exceed expenses. It also explains accounting concepts like realization, accrual, matching, and consistency that are applied when preparing the income statement.
3. TABLE OF CONTENTS
THE INCOME STATEMENT REALIZATION
REVENUES ACCRUAL
EXPENSES MATCHING
NET INCOME CONSISTENCY
ACCOUNTING CONCEPTS INCOME STATEMENT FORMAT
CONSERVATISM TEST YOUR CONCEPTS
4. THE INCOME STATEMENT
REVENUES
INFLOWS OF ASSETS THAT RESULT FROM THE CASH
OR CREDIT SALES OF GOODS AND SERVICES TO
CUSTOMERS
EXPENSES
OUTFLOWS OF RESOURCES USED TO GENERATE
REVENUES
INCOME OR PROFIT
AMOUNT BY WHICH REVENUES EXCEED EXPENSES
5. REVENUES
REVENUES
INFLOWS OF ASSETS FROM SALES OF GOODS AND
SERVICES
CASH INFLOWS WHEN SALES ARE MADE IN CASH
RECEIVABLES IN CASE SALES ARE MADE ON CREDIT
7. EXPENSES
EXPENSES
OUTFLOWS OF RESOURCES TO GENERATE THE
GOODS AND SERVICES SOLD
CASH RESOURCES ARE USED IN CASE THE EXPENSES
ARE PAID IN CASH
PAYABLES ARE GENERATED WHEN EXPENSES ARE
PURCHASED ON CREDIT
8. EXPENSES
EXPENSES
MAY NOT EQUAL CASH DISBURSED BECAUSE
PART PAYMENT FOR THEM MIGHT HAVE BEEN
MADE ON CREDIT
9. EXPENSES
EXPENSES
MAY NOT BE EQUAL TO COST INCURRED
BECAUSE COSTS MAY HAVE BEEN INCURRED FOR
GOODS AND SERVICES NOT YET SOLD
COSTS INCURRED REFLECT ON THE INCOME
STATEMENT AS EXPENSES ONLY WHEN THE
GOODS OR SERVICES GENERATED BY THEM ARE
SOLD
10. NET INCOME
NET INCOME/LOSS
NOT THE SAME AS INCREASE OR DECREASE
IN CASH
11. ACCOUNTING CONCEPTS
BASIC ACCOUNTING CONCEPTS USED IN PREPARATION
OF THE INCOME STATEMENT
CONSERVATISM
REALIZATION
ACCRUAL
MATCHING
CONSISTENCY
12. CONSERVATISM
CONSERVATISM
ANTICIPATE NO PROFITS ANTICIPATE ALL LOSSES
RECOGNIZE REVENUES WHEN REASONABLY
CERTAIN
RECOGNIZE EXPENSES WHEN REASONABLY
POSSIBLE
13. REALIZATION
REVENUE RECOGNITION
THE AMOUNT OF REVENUE RECOGNIZED IS THE
AMOUNT THAT IS REASONABLY CERTAIN TO BE
REALIZED, FOR EXAMPLE
REVENUE IS ADJUSTED FOR ESTIMATED BAD
DEBTS ON CREDIT SALES
14. ACCRUAL
REVENUE IS RECOGNISED
ON DELIVERY OF PRODUCT OR PERFORMANCE OF
SERVICE
WHEN EARNED OR ACCRUED
15. ACCRUAL
PAYMENT RECEIVED PRIOR TO DELIVERY OF PRODUCT
OR PERFORMANCE OF SERVICE IS AN ADVANCE OR
UNEARNED REVENUE
SUCH AN ADVANCE REPRESENTS A LIABILITY AND IS
NOT RECOGNIZED AS REVENUE TILL THE GOODS ARE
DELIVERED OR SERVICE IS PERFORMED
16. ACCRUAL
REVENUE RECOGNITION
REVENUE IS RECOGNIZED WHEN IT HAS BEEN
EARNED (ACCRUED), NOT NECESSARILY WHEN IT IS
PAID OR IS DUE TO BE PAID, FOR EXAMPLE,
INTEREST EARNED ON LOAN BUT NOT YET DUE
FOR PAYMENT
17. ACCRUAL
2022 2023
PRODUCT IS
DELIVERED /
SERVICE
PERFORMED
CUSTOMER PAYS FOR
PRODUCT OR
SERVICE IN CASH
INCOME
STATEMENT
BALANCE
SHEET
INCOME
STATEMENT
BALANCE
SHEET
INCREASE IN CASH
INCREASE IN
UNEARNED REVENUE
INCREASE IN
REVENUE
DECREASE IN
UNEARNED
REVENUE
18. ACCRUAL
2022 2023
PRODUCT
DELIVERED OR
SERVICE
PERFORMED
CASH PAYMENT FOR
PRODUCT/
SERVICE
INCOME
STATEMENT
INCOME
STATEMENT
BALANCE
SHEET
BALANCE
SHEET
INCREASE IN
ACCOUNTS
RECEIVABLE
INCREASE IN
REVENUE
INCREASE IN CASH
DECREASE IN
ACCOUNTS RECEIVABLE
19. MATCHING
REVENUE RECOGNIZED FIRST AND EXPENSES
MATCHED TO REVENUE
EXPENSES ARE COSTS OF GOODS SOLD OR
COSTS OF SERVICES PERFORMED
COSTS OF GOODS NOT YET SOLD OR SERVICES
NOT YET PERFORMED ARE NOT EXPENSES
20. MATCHING
COSTS THAT ARE NOT MATCHED TO REVENUES BUT
ASSOCIATED WITH ACTIVITES OF CURRENT
ACCOUNTING PERIOD ARE EXPENSES OF THE CURRENT
ACCOUNTING PERIOD FOR EXAMPLE ADMINISTRATIVE
EXPENSES, SELLING AND MARKETING EXPENSES
SUCH COSTS ARE CALLED PERIOD COSTS
21. MATCHING
COSTS THAT HAVE BEEN INCURRED BUT CANNOT BE
ASSOCIATED WITH REVENUES OF FUTURE PERIODS ARE
EXPENSES OF THE CURRENT PERIOD FOR EXAMPLE
DAMAGED GOODS
22. MATCHING
IN SUMMARY, CRITERIA FOR EXPENSE RECOGNITION ARE
COSTS MATCHED TO REVENUES OF THE ACCOUNTING PERIOD
COSTS ASSOCIATED WITH ACTIVITES OF THE ACCOUNTING
PERIOD
COSTS THAT CANNOT BE ASSOCIATED WITH FUTURE REVENUES
23. CONSISTENCY
ONCE AN ENTITY HAS DECIDED ON AN ACCOUNTING
METHOD IT SHOULD CONSISTENTLY USE THE SAME FOR
ALL SUBSEQUENT TIME PERIODS
24. INCOME STATEMENT
FORMAT
GROSS SALES
LESS SALES RETURNS AND SALES DISCOUNTS
NET SALES
LESS COST OF GOODS SOLD
GROSS INCOME
LESS OTHER EXPENSES
INCOME BEFORE TAX
LESS TAX
NET INCOME
25. TEST YOUR CONCEPTS
Which of these represent revenue and
expenses in June ?
Received orders for goods totaling
Rs.25,000 to be delivered in July
Office staff salary Rs.9,000 for June
27. TEST YOUR CONCEPTS
Which of these represent revenue and
expenses in June ?
Products in inventory costing Rs.1,250
were found to be obsolete
Sold goods with a cost of Rs.20,000 in
June
29. TEST YOUR CONCEPTS
Which of these represent revenue and
expenses in June ?
Paid Rs.500 for print advertising in June
Purchased additional inventory for
Rs.15,000
