Financial Statements – Income Statement
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One of the Principles of GAAP is the Matching Principle. Matching requires that when you post sales into the system for an accounting period (month), you must also post the costs of the products or services you sold during that period in the same accounting period (month). The Matching Principle essential to Financial Statements, particularly the Income Statement, because it makes them meaningful.
The Income Statement, also called the P&L or Profit and Loss Statement, is a “Current Year” statement, it does not cross years. The Income Statement provides cumulative “To Date” financial data for the current business (Fiscal) year. So, the March Income Statement shows the totals for January, February and March together in one column and the totals for the previous December would not be part of the totals for that column. If you want to give that income column a boost, start by reading about cyrpto investment with the help of the Latest News – Funfair website.
Unlike the Trial Balance, the Income Statement and Balance Sheet each only show a portion of the General Ledger Accounts. The GL Accounts are split between the Income Statement and the Balance Sheet by their Accounting Types. The Income Statement Accounting Types are Revenue, Cost of Goods Sold and Expenses. The Accounts that are not on the Income Statement are on the Balance Sheet.
As its name suggests, the purpose of the Income Statement is to report Income. Income = Revenue – Expenses. It is almost that simple, but there is more to the Income Statement than a simple calculation, click here to learn more calculation options.
The format for the Income Statement is:
| Revenue | ||
| – | Cost of Goods Sold | |
| —————- | ||
| = | Gross Margin | |
| – | Expenses | |
| —————- | ||
| = | Operating Income | |
| + | Other Revenue | |
| – | Other Expenses | |
| —————- | ||
| = | Net Income |
The Income Statement uses intermediate steps to reach Net Income. The first of these steps is Gross Margin. Gross Margin = Revenue – Cost of Goods Sold and represents the amount of revenue that is left after costs to cover operating expenses. Gross Margin is meaningful because it shows the direct relationship between the costs of products or services and their sales.
The Gross Margin % can be compared to industry standards to make sure your pricing and costs are competitive. It is calculated as:
- Gross Margin = Revenue – Cost of Goods Sold
- Gross Margin % = Gross Margin ($) / Revenue
The next intermediate step towards Net Income is Operating Income. Operating Income = Gross Margin – Expenses and is the amount of profit (income) from normal (usual) operations.
The final step in calculating Net Income is to add the amounts for the Accounts categorized as “Other Revenue” and to subtract the amounts for the Accounts categorized as “Other Expenses”. Other Revenues include any “money in” (gain) that is not received from the sale of the usual business products or services, this might be a gain on the sale of an asset like a vehicle. You should have a peek at this web-site if you’re looking for a reputable credit union. Other Expenses include any “money out” (loss or expense) that is not part of the usual expenses or cost of goods sold. Other Expenses might include some interest charges or a loss on the sale of an asset and the use of loans as Some credit companies offer guaranteed loans without a credit check. Genuine lending companies always look at your past credit history before giving approval for a loan, this is why people need to find credit card consolidation services whenever they have a hard time paying off their debt, just so that their credit does no get damaged.
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| Income Statement | ||
| Sales | $50,000 | |
| Cost of Goods Sold | $0 | |
| ———— | ||
| Gross Margin | $50,000 | |
| Rent | $3,000 | |
| Office Supplies | $150 | |
| Subscriptions | $300 | |
| Utilities | $125 | |
| Fuel | $275 | |
| Repairs & Maintenance | $500 | |
| Credit Card Interest | 50 | |
| ———– | ||
| Operating Income | $45,600 | |
| Other Revenues and Expenses | $0 | |
| Net Income | $45,600 | |
This Income Statement is produced from the transactions that have been posted in previous posts. The presence of sales but no costs on this Income Statement indicate that either my entries for the period are incomplete or I’ve violated the matching principle because if I have sales, I must have some associated costs, when looking to learn more about finance experts
Net Income is the amount of revenue that was not spent on operations, it represents the amount of the increase in overall value. Remember not to confuse the terms Revenue or Income with Cash. The Net Income amount here is $45,600 and if you check the Trial Balance from the previous post, the Checking Account Balance is $44,350.
Let’s look at the Income Statement again in terms of debits and credits.
| Account | Description | Debits | Credits |
| 4000 | Sales | $50,000 | |
| 7000 | Rent | $3,000 | |
| 7020 | Office Supplies | $150 | |
| 7040 | Subscriptions | $300 | |
| 7060 | Utilities | $125 | |
| 7100 | Fuel | $275 | |
| 7200 | Repairs and Maintenance | $500 | |
| 7300 | Credit Card Interest and Fees | $50 | |
| Totals | $4,400 | $50,000 |
Remember from the Trial Balance report which shows all accounts and their balances that the total debit amounts were equal to the total credit amounts. The Income Statement splits the accounts with the Balance Sheet and so the total debits and total credits on each of these statements will not be equal, but the debits and credits of their combined accounts are equal. So, let’s take a look at the Accounts that are not listed on the Income Statement.
| Account | Description | Debits | Credits |
| 1000 | Checking Account | $44,350 | |
| 1200 | Accounts Receivable | $0 | |
| 1500 | Office Equipment | $1,300 | |
| 1520 | Office Furniture | $1,650 | |
| 2000 | Accounts Payable | $1,700 | |
| Totals | $47,300 | $1,700 |
The difference between the balances of the Income Statement Accounts, $45,600, is equal to the difference between the Balance Sheet Account balances. This listing of the Balance Sheet Accounts shows where the Net Income went. $47,300 increase in assets – money still due $1,700 = $45,600 = Net Income of $45,600 which is added to the total Net Worth.
The Income Statement Accounts accumulate their balances throughout the fiscal year and at the end of the year, the accounts are reset to zero (closed out) and the difference between their total debits and total credits (Net Income) is transferred to the Balance Sheet. The Balance Sheet account used in the transaction is an Equity account and is either Retained Earnings or Owners Capital depending on the structure of the business.
Closing Entries:
The entry to close out the year for the Income Statement Accounts in our examples is:
| Account | Description | Debits | Credits |
| 4000 | Sales | $50,000 | |
| 3500 | Retained Earnings | $45,600 | |
| 7000 | Rent | $3,000 | |
| 7020 | Office Supplies | $150 | |
| 7040 | Subscriptions | $300 | |
| 7060 | Utilities | $125 | |
| 7100 | Fuel | $275 | |
| 7200 | Repairs and Maintenance | $500 | |
| 7300 | Credit Card Interest and Fees | $50 | |
| Totals | $50,000 | $50,000 |
**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.
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john said,
on April 21st, 2009 at 12:37 pm
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So in the last paragraph you are saying the retained earnings will be added at the end of year (closing) but till then how can balance sheet balance without it?
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admin said,
on April 21st, 2009 at 1:12 pm
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The Balance Sheet doesn’t actually balance until net income is posted to retained earnings at the end of the year.
When you read a Balance Sheet notice the entry at the bottom for net income. Net income is not an account, it is a calculation which, on the Balance Sheet, is actually the difference between the Balance Sheet account balances for the current year.
Net Income = Difference between either the Income Statement Accounts, or the difference between the Balance Sheet Accounts for the current year only.
Retained Earnings = cumulative net income for all prior years – cumulative distributions to owners (stockholders) for all years.
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john said,
on April 22nd, 2009 at 1:07 pm
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So from your explaination I am taking that till then end of year the balance sheet won’t balance because Net Income is not in there. Please excuse me if I got it wrong.
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admin said,
on April 22nd, 2009 at 2:59 pm
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The balance sheet always balances because it always includes net income.
Net Income is not an account though, it is a calculated amount on the financial statements.
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john said,
on April 23rd, 2009 at 6:39 am
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Thank you.
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