1. Accounting for a Service Business Unit 1.5 Income Statements

2. Income Statement Accounts Two main sections of the income statement  Revenue and expense sections  A separate revenue account is set up for each distinct type of revenue earned by a company – the types of revenue will determine the number of revenue accounts necessary to accurately collect and summarize the revenue data  A separate expense account is set up for each major type of expense. You need to ask: Frequency of usage of expense account Dollar value of expenditure Small expenditures that occur infrequently are normally collected in one or more non-specific accounts with titles such as misc expense or general expense

3. Goldman’s Gym Income Statement For the period ending September 30, 20xx Revenue Member’s Fees$ 11,500 Rental Income 800 Total Revenue$ 12,300 Expenses Salaries3,850 Advertising2,450 Telephone190 Licensing1,100 Maintenance720 Miscellaneous1,595 Total Expenses9,905 Net Income$ 2,395

4. Accrual Accounting Revenue is earned when it is billed (not necessarily when cash is received) Expenses are generated when the expense is incurred (not necessarily when cash is paid) Accruals are made (usually) at the end of an accounting period to accommodate late invoices and timing differences

5. Income Statement Accounts To have the information necessary to prepare an income statement, accounts must be kept for the revenue and expense data for the accounting period The general ledger must contain all the accounts required to prepare both financial statements:  The balance sheet – asset, liability and owners equity accounts  The income statement – revenue and expense accounts

6. Rules of Debit & Credit for Revenue and Expenses Revenue increases owner’s equity  Therefore revenue is recorded on the credit side as owner’s equity is increased on the credit side Expenses decrease owner’s equity  Therefore expenses are recorded on the debit side as owner’s equity is decreased on the debit side Separate accounts for revenues and expenses show at a glance which sources are contributing most to the company’s total revenue and which expenses are increasing too rapidly. Remember accounting procedures are to help managers make decisions

7. Just Remember……. Revenue increases equity and is recorded as a credit Expenses decrease equity and are recorded as debits

8. Revenue DebitCredit Owner’s Equity DebitCredit Expenses DebitCredit Increase DecreaseIncrease Expenses are recorded as debits because expenses decrease equity Revenue is recorded as a credit because revenue increases equity