Recall: Balance sheet shows the financial position of a business for a specific point in time. Balance sheet shows assets, liabilities, and owner’s equity (what a business owns, owes, and the what the owner has access to if the business should close). A=L+OE What does the balance sheet NOT show us???

Income Statement REVENUES & EXPENSES Some of the information from these new accounts will be used to prepare an Income Statement. What do you think an Income Statement is? An Income Statement shows, in detail, whether the business is profitable or not … it shows if the company made a profit or loss. What accounts do you think we would use to prepare in Income Statement? 10

Sample Income Statement What does this show? Note the formatting Sample Income Statement 11

Revenue What is revenue? What impact does revenue have on equity? Selling goods or services produces revenue. What impact does revenue have on equity? Revenue is an increase in equity resulting from the sale of goods or services in the usual course of business. 12

Expenses What is expenses? What impact do expenses have on equity? The costs associated with producing revenue. What impact do expenses have on equity? Expenses represent a decrease in equity resulting from the cost of producing revenue. Examples???? 16

Net Income or Net Loss Using the revenue and expense accounts, a business can determine if they have earned a net income (profit) or a net loss. Net Income is the difference between the total revenues and total expenses, where the revenues are greater than the expenses. A Net Loss is created if expenses are greater than the revenues. 19

The word “expense” is not always required. Why? In what order are expenses listed? Date? The accounting period for which the figures have been accumulated A company can have more than one source of revenue. Net Income is not cash. It is the difference between total revenues and total expenses. 32

The Income Statement The income statement tells the owners and the managers how the business is doing. By definition, an income statement is a financial statement that summarizes the items of revenue and expense, and shows the net income or net loss of a business for a given period of time. 31

The Income Statement Who uses the Income Statement? Owners and Managers Shows if the business is making profit. Used for setting goals and policy. When compared to previous years, it provides a trend … highlighting potential problems. Bankers Supports loan decisions. Past profitability is one indicator of future potential. 33

The Income Statement Who uses the Income Statement? Income Tax Authorities Every business is required by law to prepare an income statement. The net income figure of a proprietorship must be included on the owner’s income tax return. Corporations must file their own tax returns. The income statement must be sent to the government along with the tax returns. 34

Wages $300 Fees earned $20,000 Car expense $4000 Rent $1300 Supplies expense $2000