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Accounting (74)
ACTG 1P91 (12)
Chapter 3

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Sohyung Kim

Accounting 1P91 Ch. 3 Income Statement 1. Income Statement Revisit: 1.1 Income statement reports a company’s operation over a particular period of time. Specifically revenue earned and expenses incurred. 1.2 Revenues are earned when a company delivers goods or provides services. At this point, the company may or may not receive cash. 1.3 - When a company incurs a cost, that cost is recorded as an expense if there is no future benefit (e.g. utility bills) and this accounting treatment is called “expensing a cost.” - If there is future benefit, the cost is recorded as an asset (e.g. purchase of equipment) and this accounting treatment is called “capitalizing a cost” 1.4 Income statement also reports gains and losses, which arise from non-core operating activities. 2. Format of Income Statement Luxury for Dogs Co. Income Statement For the Year Ended 12/31/2012 Revenue 2,000 Operating Expense (1,500) Operating Income 500 Other Revenue (Expenses) Interest Income 80 Interest Expense (45) Income Before Income Tax 535 Income Tax Expense (170) Net Income 365 3. Accrual Basis Business activities are measured and reported when the activities actually occur, not when the cash related to the item is received or paid. 4. Two Important Principles Under Accrual Basis 4.1 Revenue Principle: Revenues are recognized (i.e. recorded in a book) when the following conditions are met. 1. Risks and rewards of ownership of goods have passed (e.g. delivery of goods) 2. The price is fixed or determinable 3. Collection is reasonably assured 4.2 Matching Principle: Record expenses in the period when the related revenues are earned. Simple put, “let the expense follow the revenue.” Journal entry for the sales transaction: dr) Cash (+A) 125,000 cr) Sales Revenue (+R,+SE)
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