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Lesson 1: Introduction to Accounting and Business

Income Statement

An income statement measures the performance of the business by summarizing revenues and expenses for a given time period (that is, the accounting period). The accounting period, for example, might be a month, a quarter, or a year. Basically, net income or loss may be expressed as in Figure 1.6.

Net income (Net Loss) equals Revenue less Expenses
Figure 1.6. Expressing Net Income or Loss
Note: If revenues exceed expenses, it is called net income or profit. However, if expenses exceed revenues, it is called net loss.

It is very important to know when revenue is generated and expenses are incurred so that proper income is determined for a given accounting period. Make sure you understand the following definitions of revenue and expense:

  • Revenue is the amount that is earned from goods sold and services rendered in a given time period. To generate revenue, either goods need to be sold or services need to be rendered (or both). If none of these occur, then there is no revenue.
  • Expenses refer to the cost of goods and services used up in the process of generating revenue in a given time period. To incur revenue, either goods or services (or both) need to be used up. An expense is the use of an asset (cash, equipment, or supplies).
Example 1.9

We will use the balances in the accounts of MM TAX at the end of business on December 31 to prepare the financial statements. The first statement we prepare is the income statement.

 

After all of the transactions are recorded, MM TAX has the following accounts with balances:

Assets: Liabilities: Owner's equity
Cash $19,100 Accounts payable $50 Common stock +$20,000
Accounts receivable $2,500
-
Dividends -$200
Office supplies $50
-
Fees earned +$2,500
Computer +500
-
Salary expense -$200
Total assets $22,150 Total liabilities $50 Total owner's equity $22,100

The income statement is prepared as follows:

Fees earned is the revenue account for MM TAX, and salary expense is the only expense account for the company. The income statement for MM TAX is shown below:

MM TAX
Income Statement
For the month ended December 31, 20xx
Fees earned
-
$2,500
Expenses:
-
-
Salary expense
$200
-
Total expenses
-
$200
Net income
-
$2,300

* Net income will carry forward to the statement of retained earnings.


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