RevenueExpensesProfit Profit Profit is the increase in the owners 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 Revenue$500Expenses$400 Net Income $100 Net income Net income is the difference between revenue and expenses when revenue is greater than expenses Revenue$500Expenses$550 Net Loss $(50) Net income Net income is the difference between revenue and expenses when revenue is greater than expenses 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 Step One: Prepare Statement Heading Line One: Who? Line Two: What? Line Three: When? Step Two: Prepare Revenue Section The largest revenue item is usually listed first The total is placed in the right column Step Three: Prepare Expenses Section Listed in the order they appear in the ledger The total is also placed in the right column Step Four: Determine Net Income or Net Loss Double lines are ruled below the net income or net loss 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 The accrual basis of accounting matches revenue earned with expenses incurred to produce the revenue during the accounting period Recording Revenue Revenue is recorded when it is earned even if cash has not been received When revenue is earned it increases owners equity Cash Sales $2000 Sales on Credit $2500 Total Revenue $4500 Assets Increase Cash: $2000 A/R: $2500 Liabilities No Change Owners Equity Increases $4500 Recording Expenses Expenses are recorded as they are incurred whether they are cash transactions or credit transactions