Principles of Accounting, 4th edition1

The Income Statement

3

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PowerPoint 17 Chapter 3, Unit 4

The Income Statement Format

Who?

What?

When?

Revenue

minus

Expenses

equals

Net Income (Net Loss)

$

$

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PowerPoint 18 Chapter 3, Unit 4

The Income Statement:

Determining Net Income (Net Loss)

(a)

(b)

(c)

(d)

(e)

$150 000

30 000

131 000

74 000

58 000

–

–

–

–

–

$ 70 000

29 500

135 000

68 000

60 000

=

=

=

=

=

$

Revenue – Expenses = Net Income (Net Loss)

• When REVENUE is greater than expenses there is a NET INCOME.

• When EXPENSES are greater than revenue there is a NET LOSS.

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PowerPoint 19 Chapter 3, Unit 5

Revenue and Expense AccountsDetermine Net Income or Net Loss

Revenue and Expense Accounts

Net Income or Net Loss

Owner’s Capital Account

DEBIT

Decreases the Balance

NET LOSS

CREDIT

Increases the Balance

NET INCOME

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PowerPoint 20 Chapter 3, Unit 5

Income Statement Accounts

Debits and credits for income statement accounts are determined by how they affect owner’s equity.

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PowerPoint 21 Chapter 3, Unit 5

Summary of Debit and Credit Theory

Balance Sheet Accounts

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PowerPoint 22 Chapter 3, Unit 5

Summary of Debit and Credit Theory

Income Statement Accounts

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PowerPoint 23 Chapter 3, Unit 5

Transaction Analysis: Asking the Right Questions

1. Which accounts were affected?

2. Were the accounts A, L, OE, R, or E accounts?

3. Did the accounts increase or decrease?

4. Were the accounts debited or credited?

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PowerPoint 24 Chapter 3, Unit 5

The Owner’s Capital and Drawings Accounts: What Are They? (page 1)

C. PICCOLO, CAPITAL

DEBIT

Decrease

(c) Losses

CREDIT

Increase

(a) Owner’s investment

(b) Profits

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PowerPoint 24 Chapter 3, Unit 5

The Owner’s Capital and Drawings Accounts: What Are They? (page 2)

C. PICCOLO, DRAWINGS

DEBIT

Increase

(a) Withdrawals of assets and

cash

(b) Owner’s salary

CREDITDecrease

The Drawings account is a record of all withdrawals of assets by the owner.

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PowerPoint 25 Chapter 3, Unit 5

Calculating the New Capital: Net Income and Drawings, Drawings Smaller than Net Income (page

1) Owner’s Equity

D. Quan, Capital May 1 $125 400

Add: Net Income for May $5 000

Less: D. Quan, Drawings 2 580

Increase in Capital

D. Quan, Capital May 31 $

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PowerPoint 25 Chapter 3, Unit 5

Calculating the New Capital: Net Income and Drawings, Drawings Smaller than Net Income (page

2) Owner’s Equity

D.K. Kirchner, Capital June 1 $56 500

Add: Net Income for June $6 000

Less: D.K. Kirchner, Drawings 2 600

Increase in Capital

D.K. Kirchner, Capital June 30 $

• Net Income INCREASES Capital.

• Drawings DECREASE Capital.

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PowerPoint 26 Chapter 3, Unit 5

Calculating the New Capital: Net Loss and Drawings

Owner’s Equity

K. Chari, Capital July 1 $228 900

Less: Net Loss for May $1 500

Less: K. Chari, Drawings 2 400

Decrease in Capital

K. Chari, Capital July 31 $

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PowerPoint 27 Chapter 3, Unit 5

Drawings Larger than Net Income

Owner’s Equity

C. Hnatyshin, Capital August 1 $87 200

Add: Net Income for May $ 310

Less: C. Hnatyshin, Drawings 1 730

Decrease in Capital

C. Hnatyshin, Capital August 31 $

Net Loss DECREASES Capital.

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PowerPoint 28 Chapter 3, Unit 5

The General Ledger