THE INCOME

STATEMENT
PROF. ZEUS A. ABOY, CPA MBA EDL (CANDIDATE)
LEARNING OBJECTIVES

At the end of this chapter, you are expected to:

a) Define income statement and the element shown in the

statement.
b) Define revenues and expenses and provide examples.
c) Know the relationship of the income statement and the
statement of financial position.
d) Prepare income statement.
ACCOUNTING CONCEPT IN ACTION

COMPANY A COMPANY B

Service income P240,000 Service income P240,000

Operating expenses 250,000 Operating expenses 210,000

Net loss P10,000 Net income P30,000

- Which of the two companies perform better than the other?

- If you are the investor which of the two companies will you invest? Why?
ACCOUNTING CONCEPT IN ACTION
INCOME MEASUREMENT

Revenue – Operating expenses = Net income (loss)

THE MATCHING CONCEPT

In preparing the income statement, the guiding principle is matching of

cost and revenue. According to this principle, revenues are recognized in
the same time or period or year that the expenses are also recognized.
ELEMENTS OF INCOME STATEMENT

1) Revenue
2) Operating Expenses
Revenue represents the income generated or earned by the business in
rendering services to customers. This is from the main line of business.
For service business, we use Service Income or Service Fees as account
title.
For merchandising business, we use Sales as account title.
Other income are from sources other than the main line of business.

Example: Interest income on bank deposits, Gain on sale of asset

Operating expenses are expenses incurred in the conduct of the business.
Examples:
Salaries and wages Utilities expense
Employee benefits Communications expense
Repairs and maintenance Supplies expense
Rent expense Professional fees
Other expenses are expenses other than those incurred in generating
the revenue.
Example: Interest expense on loans
PRESENTATION

Heading
1st line - Name of the company
2nd line - Name of the statement (Income Statement)
3rd line - Period covered (For the year ended, For the month
ended)
An income statement can be presented either in single-step or multiple
step.
For single-step income statement, all the revenues are presented
together, regardless of whether it revenue is from the main business or
not, in the same manner that expenses are presented together.
A multiple-step income statement presents first the revenue derived
from the main business followed by the cost related to the revenue. This
highlights the gross profit portion. After the gross profit, operating
expenses are presented to get the income from operations. From the
income from operations, revenues and expenses not from the main
activity, such as interest income and interest expense, are added or
deducted to come up with income before income tax. Income tax
expense is then deducted to come up with the net income.
FUNDAMENTALLY RELATED FINANCIAL
STATEMENTS
 LABA MO TO

INCOME STATEMENT

For the month ended January 31, 2018

Service income P 10,000

Operating expenses

Rent expense 10,000

Utilities expense 3,000

Depreciation expense 1,458

Supplies expense 1,200

Total operating expenses 15,658

Net loss P (5,658)

ETHICS IN ACCOUNTING

The accountants should ensure that only the transactions of the business
are recorded in the books (entity concept) and the expenses personal to
the owners are not reflected as business expenses in order to report
lower income and pay lesser tax.
Fraudulent activity involved in the preparation of the income statements
are: reporting revenues no in the proper period in order to report
lesser revenues, expenses are not recognized in the same period as the
revenues in order to produce more expenses and lesser net income and
taxes. It is therefore important for accountants to ensure that the
matching principles are strictly observed by the company.
EXERCISE 1

Revenue Operating Net income

Expenses (loss)
Case 1
P10,000 P5,000 ________________
Case 2
P120,000 _______________ P30,000
Case3
________________ P65,000 (P20,000)
Case 4
P540,000 P410,000 ________________
Case 5
________________ P210,000 P50,000