Chapter 3 Transactions that Affect the Income Statement Elements on the Income Statement Revenues Increases in assets settlements of liabilities from ongoing operations Expenses Outflows using up assets increase in liabilities Expenditure Outflow of cash for an purchase Not all expenditures are expenses Time Period Assumption Indicates that the long life of a company can be reported in shorter time periods months quarters years Operating Income Income from Operations Operating Revenue Operating Expenses Gains Increases in assets decreases in liabilities from peripheral transactions Losses Decreases in assets increases in liabilities from peripheral transactions Income before Income Taxes Pre tax Income Last expense on income statement before determining net income Earnings Per Share EPS Net Income Weighted average of of shares outstanding You will note that the earnings EPS ratio is reported on the income statement It is widely used in evaluating the operating performance and profitability of a company Net Profit Margin Net Income Net Sales Operating Revenue of Sales stockholders make as a profit Cash basis accounting records revenues when cash is received and expenses when cash is paid out records revenues when Accrual basis accounting earned and expenses when occurred regardless of timing of cash receipts payment Revenues Cash Receipts Expenses Cash Payments Net income Unearned revenue Liability Revenues When earned Expenses when incurred Net income Paid before delivery Same period as Delivery Pay after delivery On receipt of 100 cash deposit Cash A 100 Unearned revenue L 100 RECORD REVENUE HERE On delivery of ordered food Unearned revenue L 100 Sales Revenue R SE 100 On delivery of ordered food for 12 cash Cash A 12 Sales Revenue R SE 12 Revenue Realization Principal States that revenues are recognized when 1 Goods services are delivered 2 There is persuasive evidence of an argument for customer payment 3 Price is fixed determinable 4 Collection is reasonable assured On delivery of ordered food for 50 on account Accounts Receivable A 50 Sales Revenue R SE 50 On receipt of cash after delivery Cash A 50 Accounts Receivable A 50 Expense Matching Principle Requires that expenses be recorded when incurred in earning revenue Revenues Increase retained earnings credit Assets L SE Cash paid before Cash paid during Cash paid after Paid 200 for supplies Supplies A 200 Cash A 200 Used of the supplies Expenses E SE 200 Supplies A 200 RECORD EXPENSE HERE Paid 275 for same day repairs Repairs expense E SE 275 Cash A 275 Use of 400 in employee services Wages expense E SE 400 Accrued expenses payable L 400 On payment of cash for employee services Accrued expenses payable L 400 Cash A 400 Revenues Increase RE credit Increase Net Income or Expenses Decrease RE debit Decrease Net Income or Dividends Decrease RE Expenses Debit Credit Retained Earnings Credit Debit Revenues Debit Credit Net Income Increase RE Closing Entries Debit Revenues Credit Retained Earnings Debit Retained Earnings Credit Expanses Revenues Expense Accounts 0
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