Income Statements
Let’s Go Over the Terms
Definitions
• Income Statement
• Revenue
• Expenses
• Drawings
• An Income Statement is a financial report that shows us the revenue, subtracts expenses, and reveals profit made over a period of time.
• Also called Income. It is an increase in equity that comes from the sale of goods or services in the usual course of business.
• Expenses are decreases in equity that comes from operating the business.
• Drawings are decreases in equity made by the owner for use outside of business costs.
Easy Way to Remember
R E D
REVENUES
EXPENSES
DRAWINGS
Why Do we Expand the Ledger?
• Much more accurate picture of what the business is doing.
• Shows money in, money out, and what it is being spent on.
Let’s look at some “Nets”
• Net Income
• Net Loss
• If total revenues are more than the total expenses, the business has gained “Net Income.”
• A Net loss is when the expenses are higher than the revenues.
Who uses Income Statements?
• Owners and Managers
• Bankers
• Investors
• Income Tax Authorities
• Planning decisions? Hiring? Company goals? Correcting mistakes?
• Can they pay the loan back?
• Can I make money by investing? Are they making a profit?
• How much tax do they owe the government?
Chart of Accounts
• In most businesses, accounts are given code numbers. It is usually a 4-digit number.
• Quick identification is its purpose.
Chart of Accounts
• A Chart of Accounts is a list of the ledger accounts with their numbers listed in ledger order.
• Most businesses have a copy of this list for employees to see and learn.
Equity Section Summary
• There are four types of accounts in the equity section:
• 1. Capital – Normally only has the beginning equity and new investments from the owner. Normally a credit balance if business is doing well.
• 2. Revenues – Increases come from the sale of goods or services.
• 3. Expenses – Decreases in equity because of costs of materials or services used to produce revenue.
• 4. Drawings - Decreases in equity resulting from the owner taking money out for personal use.
What is wrong with this Income Statement?
#2
• Prepare a Chart ofAccounts for ExpressAir Services using theseaccounts.
Page 142, #3
• Let’s look at the T-Account Ledger for Emily Stokaluk.
• Put it into a trial balance.
• Prepare a chart of accounts.
• Prepare an income statement for the month of March.
Page 142, #4
• Sean O’Neill operates a home renovation business called Meadowlark Makeovers. He was fully occupied during the month of July working on a kitchen renovation. His daughter just started doing the bookkeeping for the business. She was pleased that she was able to balance the ledger using the debit and credit theory she learned in high school.
Here is Sean’s Capital Account
• Divide up the Capital account into T-Accounts.
• We have to figure out what it is that he has spent his money on.
