Income statement presentation @ DOMS

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Income statement presentation @ DOMS

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Income statement presentation @ DOMS

  1. 1. FINANCIAL ACCOUNTING BASICS
  2. 2. Part Three <ul><li>J. Income Statement </li></ul><ul><li>K. Income Statement Presentation </li></ul><ul><li>L. Retained Earnings Statement </li></ul><ul><li>M. Journal and Ledger </li></ul>
  3. 3. J. INCOME STATEMENT <ul><li>In Part Two we saw that transactions that increase income are reflected on the balance sheet in Retained Earnings. </li></ul><ul><li>During the month of January, Retained Earnings for ABC Company increased by $1,500. </li></ul><ul><li>Income earned during the month of January was $1,500. </li></ul><ul><li>Income was generated as follows: </li></ul>
  4. 4. J. INCOME STATEMENT (cont) <ul><li>5. Rather than recording revenues and expenses directly into the </li></ul><ul><li>Retained Earnings account, separate Revenue and Expense </li></ul><ul><li>accounts are used. </li></ul><ul><li>6. Accounting Conventions </li></ul><ul><ul><li>Retained earnings are increased through credits </li></ul></ul><ul><ul><li>Revenues increase Retained earnings, so </li></ul></ul><ul><ul><li>Revenues are: </li></ul></ul><ul><ul><ul><li>increased by making credits </li></ul></ul></ul><ul><ul><li>Retained earnings are decreased through debits </li></ul></ul><ul><ul><li>Expenses decrease Retained Earnings, so </li></ul></ul><ul><ul><li>Expenses are: </li></ul></ul><ul><ul><ul><li>increased by making debits </li></ul></ul></ul>
  5. 5. J. INCOME STATEMENT (cont) <ul><li>Illustration </li></ul><ul><li>Transaction 4: On January 9, ABC Company sells inventory that cost </li></ul><ul><li>$2,000 for $2,500 in cash. </li></ul><ul><li>Transaction 6: On January 12, ABC Company sells inventory that cost </li></ul><ul><li>$4,000 for $5,000, on account. </li></ul>Revenues increase retained earnings, so revenues are credited Expenses decrease retained earnings, so expenses are debited
  6. 6. J. INCOME STATEMENT (cont) Cash Retained Earnings Expenses Revenues Inventory Accounts Receivable 2,500 2,500 Begin 8,000 2,000 2,000 4,000 5,000 5,000 4,000 End 2,000 6,000 6,000 6,000 7,500 7,500 7,500 0 0 Transaction 4: On January 9, ABC Company sells inventory that cost $2,000 for $2,500 in cash. Transaction 6: On January 12, ABC Company sells inventory that cost $4,000 for $5,000, on account. 1,500
  7. 7. K. INCOME STATEMENT PRESENTATION Note that the income statement presents several measures of profit/income: (1) gross profit, (2) operating income, (3) income before taxes, and (4) net income. The next slide describes the classification of expenses.
  8. 8. K. INCOME STATEMENT PRESENTATION (cont) <ul><li>Expenses normally are classified as: operating and nonoperating . </li></ul><ul><li>Operating expenses – include: </li></ul><ul><ul><ul><li>Cost of goods sold </li></ul></ul></ul><ul><ul><ul><li>Selling expenses </li></ul></ul></ul><ul><ul><ul><li>General and administrative expenses </li></ul></ul></ul><ul><ul><ul><li>Research and development expenses </li></ul></ul></ul><ul><li>Nonoperating expenses – include: </li></ul><ul><ul><ul><li>Interest expense – this is a financing expense </li></ul></ul></ul><ul><ul><ul><li>Other (miscellaneous) expenses </li></ul></ul></ul><ul><ul><ul><ul><li>includes losses on sales of assets </li></ul></ul></ul></ul><ul><li>Income tax expense ( Provision for income taxes ) is also an operating expense. It is always shown separate from other operating expenses, after the calculation of Income before Taxes. </li></ul>
  9. 9. L. RETAINED EARNINGS STATEMENT <ul><li>The Retained Earnings Statement summarizes the changes in Retained earnings that occurred during the accounting period. </li></ul><ul><li>Net income increases Retained earnings. </li></ul><ul><li>Dividends decrease (are paid out) of Retained earnings. </li></ul><ul><ul><li>Many companies prepare a Statement of Changes in Stockholders’ Equity that summarizes the changes in all Stockholders’ equity accounts, including Retained earnings, during the accounting period. </li></ul></ul>
  10. 10. M. JOURNAL AND LEDGER <ul><li>Accountants record transactions in “books” – the primary books used are the Journa l and the Ledger . </li></ul><ul><li>Journal – transactions are first entered into a journal (the journal is the company’s diary) – an explanation of each transaction is provided. </li></ul><ul><li>Ledger – journal entries are then posted to the ledger (each account has a separate page in the ledger) – easier to determine balance in accounts. </li></ul><ul><li>The next slide shows ABC Company’s Journal for the month of January, Year 1. Each transaction 1 – 7 has been recorded in a debit/credit journal entry. Remember that debits increase assets and decrease liabilities and stockholders’ equity; credits decrease assets and increase liabilities and stockholders’ equity. </li></ul>
  11. 11. M. JOURNAL AND LEDGER (cont) Journal Date Accounts Debit (Dr.) Credit (Cr.) Jan. 2 Cash Paid-in Capital 10,000 10,000 3 Cash Notes Payable 5,000 5,000 4 Inventory Accounts Payable 8,000 8,000 9 Cash Revenues 2,500 2,500 Expenses Inventory 2,000 2,000 10 Accounts Payable Cash 8,000 8,000 12 Accounts Receivable Revenues 5,000 5,000 Expenses Inventory 4,000 4,000 31 Cash Accounts Receivable 5,000 5,000
  12. 12. M. JOURNAL AND LEDGER (cont) <ul><li>The next slide shows the pages in the ledger for Cash (Acct. No. 101) and Paid-in Capital (Acct. No. 301). </li></ul><ul><li>From the Ledger , it is possible to determine the balance in each account at any point in time. </li></ul><ul><ul><li>For example, we can see that Cash had a balance of $17,500 on January 9. </li></ul></ul><ul><li>It is more difficult to determine the balance in an account from the Journal . </li></ul>
  13. 13. M. JOURNAL AND LEDGER (cont) Ledger Account Title Cash Account Number 101 Account Title Paid-in Capital Account Number 301 Date Explanation Debit Credit Balance Jan. 2 Investment by owners 10,000 10,000 3 Borrowing from bank 5,000 15,000 9 Sale of goods 2,500 17,500 10 Payment of suppliers 8,000 9,500 31 Collection from customers 5,000 14,500 Date Explanation Debit Credit Balance Jan. 2 Investment by owners 10,000 10,000
  14. 14. M. JOURNAL AND LEDGER (cont) <ul><li>4. Most companies have a computerized accounting system, in which: </li></ul><ul><ul><ul><li>The accountant analyzes transaction to determine which accounts are affected and whether each account is increased or decreased (debit or credit). </li></ul></ul></ul><ul><ul><ul><li>The accountant then inputs data (DATE, ACCOUNTS, DEBIT/CREDIT ) into the system, and the journal entry is prepared and automatically posted to ledger. </li></ul></ul></ul><ul><ul><ul><li>End of Part Three </li></ul></ul></ul>

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