How the Income Statement Amounts are Calculated

How the Income Statement Amounts are Calculated

What is income statement?

The income statement is also known as the statement of operations, profit and loss statement, and statement of earnings. It is one of a company's main financial statements. The purpose of the income statement is to report a summary of a company's revenues, expenses, gains, losses, and the resulting net income that occurred during a year, quarter, or other period of time.

Example:

The main items reported in the income statement are:

  • Revenues, which are the amounts earned through the sale of goods and/or the providing of services
  • Expenses, which include the cost of goods sold, SG&A expenses, and interest expense
  • Gains and Losses, such as the sale of a non-current asset for an amount that is different from its book value
  • Net income, which is the result of subtracting the company's expenses and losses from the company's revenues and gains. Corporations with shares of common stock that are publicly traded often refer to net income as earnings and their income statements must include the earnings per share of common stock.

How the Income Statement amounts are calculated

The income statement amounts are best calculated for a specific period of time by using the accrual basis of accounting. Under the accrual basis the revenues are the amounts that were earned (not the amount of cash received), and the expenses are the amounts that best match the revenues or were used up during the period (not the cash that was paid out).


What are income statement accounts?

Income statement accounts are one of two types of general ledger accounts. (The other accounts in the general ledger are the balance sheet accounts.)

Income statement accounts are used to sort and store transactions involving:

  • Operating revenues
  • Operating expenses
  • Non-operating revenues and gains
  • Non-operating expenses and losses

Large companies may have thousands of income statement accounts in order to budget and report revenues and expenses by divisions, product lines, departments, and so on.

Income statement accounts are also referred to as temporary accounts or nominal accounts because at the end of each accounting year their balances will be closed. This means that the balances in the income statement accounts will be combined and the net amount transferred to a balance sheet equity account. In the case of a corporation, the equity account is Retained Earnings. In the case of a sole proprietorship, the equity account is the owner's capital account. As a result, the income statement accounts will begin the next accounting year with zero balances.

Example:

A few of the many income statement accounts used in a business include Sales, Sales Returns and Allowances, Service Revenues, Cost of Goods Sold, Salaries Expense, Wages Expense, Fringe Benefits Expense, Rent Expense, Utilities Expense, Advertising Expense, Automobile Expense, Depreciation Expense, Interest Expense, Gain on Disposal of Truck, and many more.

Are divided payments shown as an expense on the income statement?

A corporation's dividends are not an expense and therefore will not appear on its income statement. Cash dividends are a distribution of part of a corporation's earnings that are being paid to its stockholders.

When a corporation has preferred stock, the dividends on preferred stock are deducted from a corporation's net income in order to arrive at earnings available for common stock. Earnings available for common stock is reported on the income statement. It is also used to calculate the common stock's earnings per share. The earnings per share figure is reported on the income statement when the corporation's stock is publicly traded.


Should a retailer's delivery surcharges be reported as revenues or as other income?

A retailer's delivery surcharges are a price adjustment and should be reported as operating revenues. The surcharges are operating revenues that will be matched with the higher operating expenses such as gasoline. The delivery surcharges should not be reported as non-operating revenues or other income. Non-operating revenues or other income items would be outside the main activities of the retailer and would include items such as interest earned or the gain on the sale of a plant asset.

The retailer can record the delivery surcharges in a separate operating revenue account. In other words the sales revenues account could be used to record the revenues excluding the surcharges and then another sales revenue account could be designated as the delivery surcharge revenues account. Those two accounts would then be added together to report total operating revenues.


Will the adjusting entry amounts appear in the balance sheet and income statement?

Absolutely. The adjusting entry amounts must be included on the income statement in order to report all revenues earned and all expenses incurred during the accounting period indicated on the income statement. The adjusting entry amounts must also be included in the amounts reported on the balance sheet as of the end of the accounting period.

In the following accounting period, the accrual-type adjusting entries will usually be reversed. They are reversed or removed because the actual invoices or other documents containing the accrued revenues or expenses will be arriving and will be entered into the accounting records by the bookkeeper or the accounts payable clerk.



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