2. RevenueExpensesProfit

3.  Profit  Profit is the increase in the owner’s equity that results from the successful operation of a business  Revenue  Revenue is amounts earned from the sale of goods and services during the routine operation of the business  Expenses  Expenses are the cost of items or services used up in the routine operation of the business

4. Revenue$500Expenses$400 Net Income $100  Net income  Net income is the difference between revenue and expenses when revenue is greater than expenses

5. Revenue$500Expenses$550 Net Loss $(50)  Net income  Net income is the difference between revenue and expenses when revenue is greater than expenses

6. income statement accounting period The income statement presents the revenue, expenses, and net income/loss for a specific period of time; called an accounting period

7. Step One: Prepare Statement Heading Line One: Who? Line Two: What? Line Three: When?

8. Step Two: Prepare Revenue Section  The largest revenue item is usually listed first  The total is placed in the right column

9. Step Three: Prepare Expenses Section  Listed in the order they appear in the ledger  The total is also placed in the right column

10. Step Four: Determine Net Income or Net Loss  Double lines are ruled below the net income or net loss

11. Time-Period Principle:  In order to compare different accounting periods, it is important that the length of the accounting period is consistent of time  Examples: week, month, quarter, year Matching Principle:  It is important to include only revenue earned during that period and only expenses incurred during that period

12.  The accrual basis of accounting matches revenue earned with expenses incurred to produce the revenue during the accounting period

13. Recording Revenue  Revenue is recorded when it is earned even if cash has not been received  When revenue is earned it increases owner’s equity Cash Sales $2000 Sales on Credit $2500 Total Revenue $4500 Assets Increase Cash: $2000 A/R: $2500 Liabilities No Change Owner’s Equity Increases $4500

14. Recording Expenses  Expenses are recorded as they are incurred whether they are cash transactions or credit transactions