Getting to know the balance sheet is one thing, but knowing the details about the income statement is just as important, if not more vital, in some cases. In this article, we break down everything to know about the matter, including all the income statement accounts, their definitions, and more.
Income Statement: Introduction And Overview
There are several categories used to group the accounts on the income statement. The classifications we'll employ are as follows:
- Operating Income
- Operating Costs
- Additional Income And Profits
- Additional Costs And Losses
The balances in these accounts at the conclusion of a fiscal year won't be carried over to the next one. Instead, the balances in the accounts on the income statement will be moved to the owner's capital account or Retained Earnings (for a corporation) (for a sole proprietorship).
This will make it possible for all the accounts on the income statement to start each accounting year with a balance of zero. This explains why the accounts on the revenue statement are called temporary accounts.
Operating revenues are the sums made by performing the business's primary functions.
For instance, a retailer's operational revenues come from the sales of goods.
Several illustrations of accounts used to report operational revenues include the following:
- Sales Income
- Service Earnings
- Fees Received
- Product Line #1 Sales
- Product Line #2 Sales
Since revenues lead to a growth in shareholders' or owners' equity, the revenue accounts are anticipated to have positive balances.
Sales returns, allowances, and discounts, which are considered contra revenue, will all have negative balances.
Revenues are recorded using the accrual method of accounting as of the day the items are sold, or the services are rendered.
The revenues are included on the income statement that includes December 26 if a service is rendered on December 26, but the client is permitted to pay in February.
The balance in each of the accounts used to record operating revenues will be closed at the conclusion of the accounting year in order to begin the subsequent accounting year with a balance of zero.
The costs involved in generating operational revenues are known as operating expenditures.
One of a retailer's running expenditures, for instance, is advertising.
Among the several accounts that are used to track operating expenditures are:
- Cost Of Goods Sold (COGS)
- Salaries Cost
- Fringe Benefit Costs
- Rent Costs
- Utilities Cost
- Buildings' Depreciation Expense
- Equipment Repairs And Depreciation Expenses
There should be a debit balance in the accounts for operational expenditures.
The costs should be recorded in the same accounting period as the corresponding revenues in accordance with the accrual method of accounting.
An expense should be reported in the accounting period in which its cost expires or is used up if that is uncertain.
Costs are frequently categorized according to function, such as production, sales, and general administration.
When costs are grouped by responsibility, for example, Department #1, Sales Region #5, Warehouse #2, Legal Department, etc.
The balance in each of the accounts used to record operational expenditures will be closed at the conclusion of the accounting year in order to begin the subsequent accounting year with a zero balance.
Non-Operating Profits And Revenues
Non-operating or other revenues are earnings made from sources other than a company's primary business operations.
One example of non-operating or other revenue is the interest a shop receives on its idle cash holdings.
Gains frequently arise when a firm sells a used asset, and the proceeds obtained exceed the asset's carrying value on the business's records.
For instance, there will be a profit of SAR 2,000 if a business automobile is sold for SAR 20,000 while its book value is SAR 18,000 instead.
Since non-operating income, other revenues, and profits enhance stockholders' equity, it is expected that these accounts would have credit balances.
Read more about Variable Cost vs. Fixed Cost.
Losses And Non-Operating Expenses
Non-operating expenditures, often known as other expenses, are the costs incurred to generate non-operating income.
In addition, interest costs are classified as either additional expenses or non-operating costs for retailers.
(However, one of a bank's running costs is the interest charge paid for the usage of depositors' funds.
When a business sells a long-term asset for cash and receives less money than the item is worth on paper, a loss is recorded.
A loss of SAR 3,000 will be reported, for instance, if a business automobile is sold for SAR 15,000, but its book value is SAR 18,000 instead.
The expense of a lawsuit is another type of loss.
Due to the fact that non-operating costs and losses reduce stockholders' equity, these accounts will have negative balances.
Now you know each account of the income statement and exactly what they stand for.
Using them you can analyze, interpret, and compile this important financial statement at any time—the only thing left is to practice.
If you’d like to learn more about the income statement and its accounts, check out one of our related articles now—see you there!
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