assume a company s income statement for year 12 is as follows This is a topic that many people are looking for. bluevelvetrestaurant.com is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, bluevelvetrestaurant.com would like to introduce to you Income Statement Explained: Comprehensive Income Statement Tutorial Profit & Loss Statement. Following along are instructions in the video below:
“Welcome to this quick guide into the income statement. So what is the income statement. Statement. Income statement.
Is also known as the profit and loss statement. And it s of the four main financial statements. So we have the income statement. The focus of today s tutorial.
There s the balance sheet the cash flow statement and the statement of changes in equity and they re the four main financial statements specifically the income statement. Is like a video of the organization s financial performance. Attacker video. Because it s a set of measurements across the set time or accounting period for example.
You can have an income statement from the 1st of january 2016 to the 31st of december 2016. And while the balance sheet on the other hand is a snapshot in time and represents. One particular date. An income statement represents a length of time the income statement lowest income accounts their respective totals and an overall sum total followed by expense accounts.
They re expressed with totals and an overall sum total and ends with a net income result. Which is income minus expenses here s a quick simple example you have income up the top. The account on the left hand side. The figures down the right hand side expenses below that some general expenses and the amount on the right hand side are net income down.
The bottom so income represents a. Figure. Of. 100000 expenses total 70000.
100000 minus. 70000 resolved in a net income figure of 30000. So what is income that sits at the top of the statement. Here s the complicated accounting jargon definition.
This is provided by the iasb conceptual framework and is the formal definition of income income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity other than those related to contributions from participants. But that s a very complicated definition here s a more simplified definition. Receiving inflows of money that result in more assets or less liabilities. That improve the net worth or equity of a business income reflects.
What the business sells income reflecting. What the business sells is some a simplified definition. How is income broken down income is broken down into two major categories. There s revenue and games now revenue is income earned in the ordinary activities of an entity in other words.
It s doing what the business normally does if you re in the widget sales business. Then if you saw widgets that s revenue. If you re if you re a service business. Perhaps an accounting service.
So earning money through your accounting business will be revenue on the flip side gains. I income earned that may or may not arise in the ordinary activities of the business in other words. It s only income through more abnormal activities. The example.
We have here is a book retailer selling a company car and a profit. So while selling the company car would be different would be defined as income and will contribute to net profit at the end selling company cards is in the core operations of a book retailer. Now there are five criteria for revenue recognition. So when does revenue appear on the income statement.
You must meet all of these five criteria firstly..
The entity has transferred to the buyer. The significant risk some rewards of ownership of the goods that are selling secondly. The entity retains near the continual manager or involvement to the degree usually associated with ownership nor effective control over the goods sold as an example take mcdonald s that sell big macs hamburgers. Now if i walked into mcdonald s and purchase a big mac on the counter at what point does the buyer may take the significant risks and rewards of ownership of the goods.
This may be when the mcdonald s worker. Hands me the big mac from then on i had the risk or rewards of ownership. If i dropped the hamburger that s a risk i have to face that i might always my hamburger well if i eat the hamburger. I have the capability to enjoy those rewards of ownership that s the first criteria as for the second criteria windows mcdonald s lose managerial involvement over that big mac when does it lose effective control over that particular hamburger that it sold me at that point in time it s the second criteria revenue recognition.
The third criteria is the amount of revenue must be reliably measured. So mcdonald s using the same example would have to know how much i paid for the burger fourthly. It must be probable that the economic benefits associated with the transaction will flow to the entity. That is mcdonald s the hamburger seller must know that is probable.
The data is going to receive the cash from the big mac sale that s the fourth criteria and finally the fifth criteria that the costs incurred or to be incurred in respect of the transaction can be measured. Reliably that must mean mcdonald s must know how much it costs to produce that hamburger that are later sold to me. It must tell how much the patty cost how much the bun cost. The special sauce.
Cost. It must be able to reliably measure those costs that go into the income generating. Big mac. Once all these five criteria are met and a must be all five.
Then revenue can be recognized. Which will later appear on the income statement. Now when it comes to mcdonald s and big mac sales. This is a pretty simple and straightforward transaction.
The revenue recognition principles are pretty black and white..
But you ll find in many businesses. Their transactions are far more complex. And there s a lot of gray area about when revenue should be recognized that s why there are these five strict criteria. Okay so we ve covered income now we ll move on to expenses and we re going to use another complicated accounting jargon definition.
And then move on to a simplified definition. But before i talk about this just try to remember back to that complicated accounting jargon definition of income as i read this look how close these two definitions are you ll see that the iasb conceptual framework definition of expenses is basically a mirror image of income so here we go expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or in currencies of liabilities that result in a decrease in equity other than those related distributions equity participants. See how somewhere they were but it was the reverse and here s the simplified definitions. There are flows of money that result in less assets or more liabilities.
That lower the net worth or equity of the business. Essentially these are the costs incurred in operating a business to generate income they are the opposite of income once again expenses are broken down into two major categories. These are expenses and losses sorry that i expenses are broken down into two categories being expenses or there s a duplication of the word expenses. But hopefully the following couple of slides will explain it now expenses are expenses that are incurred in the ordinary activities of the entity.
So this is like salaries or rent paying your staff or paying for the office rent is an ordinary activity. The entity and the losses similar to gains which we talked about earlier our expenses incurred. Which may or may not arise in the ordinary activity. The entity so these are the more abnormal expenses and these can be impairments or foreign currency license for fx losses.
Now when our expense is recognized expenses are matched using the matching principle and the matching principle is one of the core concepts of accounting. The matching principle stay that expenses should be recognized in the same accounting period as the revenue that they the expenses generate that you ve been matched against the income that they generate this is based on the idea that any business will only incur expenses on the premise. That all they will earn income from these particular expenses using our mcdonald s example again in application. This will mean that when mcdonald s recognized the expense of the patty or the expense of the bun of the expense of the sauce or the expense of the staff member that served me they should recognize those particular expenses in the same accounting period.
That i purchased my big mac. That should all line up this matching principle allows a better measurement of profit and remember that profit equals income minus expenses and our goal is have an accurate measure of profit so if we line up the income and expenses that are related to each other in the same accounting period. Then we will have a more accurate profit figure. We can truly see whether these particular business expenses are generating a profit based on how much in how much income we earn from those expenses the matching principle is a mix of accrual accounting and revenue recognition principles.
Okay so we ve talked about income..
We ve talked about expenses as let s talk about net income. Then income is the result of the previous two subjects net income is income minus expenses that income is also known as profit or net profit or simply earnings you ll often hear of photos. The bottom line. This is because it sits on the very bottom line of an income statement.
It s also then income is a very important figure and that s why often waihi people refer to as the bottom line of a particular situation being a very important outcome of that particular situation. This is because net income is often the automat goal of a business. It is the bottom line now when expenses are greater than income the it s referred towards a loss or a net loss. But what is net income represent well profit or net income is performance indicator representing the outcome of achieving the profit motive now in an old fashioned neoclassical black and white world that the only reason businesses.
Exist is to achieve a profit. The net income figure is the indicator of how well it achieves a particular profit motive. But a more accurate representation of what net income is it is that it represents a betterment of a business s position over the period. So either financial capital being at assets or physical capital being the productive capacity excluding the distributions and contributions from the owners so over a period.
Even an assets have increased that s a betterment of a business position. It s got more assets or if the productive capacity has increased through an increase in the physical capital. Then this is also a better betterment of a business s position and both of these outcomes where the financial capital betterment or physical happen or betterment is a result of profit over the period. So here s a review.
The income statement is like a video across a period of time of the financial performance of a business. It is income followed by expenses which result in net income or profit or net loss or loss and never forget income minus expenses equals net income that s it thanks very much for your time. That is a quick guide to the income statement. I hope you can give me a thumbs up if you enjoyed and got value from this tutorial cheers.
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