Accounting for a Service Business

Unit 1.5

Income Statements

Income Statement Accounts Two main sections of the income statement

Revenue and expense sections A separate revenue account is set up for each distinct

type of revenue earned by a company – the types of revenue will determine the number of revenue accounts necessary to accurately collect and summarize the revenue data

A separate expense account is set up for each major type of expense. You need to ask:

Frequency of usage of expense accountDollar value of expenditureSmall expenditures that occur infrequently are

normally collected in one or more non-specific accounts with titles such as misc expense or general expense

Goldman’s Gym

Income Statement

For the period ending September 30, 20xx

Revenue

Member’s Fees $ 11,500

Rental Income 800

Total Revenue $ 12,300

Expenses

Salaries 3,850

Advertising 2,450

Telephone 190

Licensing 1,100

Maintenance 720

Miscellaneous 1,595

Total Expenses 9,905

Net Income $ 2,395

Accrual Accounting

Revenue is earned when it is billed (not necessarily when cash is received)

Expenses are generated when the expense is incurred (not necessarily when cash is paid)

Accruals are made (usually) at the end of an accounting period to accommodate late invoices and timing differences

Income Statement Accounts

To have the information necessary to prepare an income statement, accounts must be kept for the revenue and expense data for the accounting period

The general ledger must contain all the accounts required to prepare both financial statements: The balance sheet – asset, liability and

owners equity accounts The income statement – revenue and

expense accounts

Rules of Debit & Credit for Revenue and Expenses Revenue increases owner’s equity

Therefore revenue is recorded on the credit side as owner’s equity is increased on the credit side

Expenses decrease owner’s equity Therefore expenses are recorded on the debit side as

owner’s equity is decreased on the debit side Separate accounts for revenues and expenses

show at a glance which sources are contributing most to the company’s total revenue and which expenses are increasing too rapidly.

Remember accounting procedures are to help managers make decisions

Just Remember…….

Revenue increases equity and is recorded as a credit

Expenses decrease equity and are recorded as debits

Revenue

Debit Credit

Owner’s Equity

Debit Credit

Expenses

Debit Credit

Increase Increase

Decrease Increase

Expenses are recorded as debits because expenses decrease equity

Revenue is recorded as a credit because revenue increases equity