Operating a Business and the Income Statement

Income Statement Accounts Cash Expenditures Debt Payments Expenses Asset Purchases

Income Statement Accounts

Operating Cycle Typical Operating Cycle Purchase good and services Pay cash to suppliers Sell goods and services to customers Receive cash from customers

Cash-Based Measurements Cash basis accounting records revenues when cash is received and expenses when cash is paid.

Accrual Basis Accounting GAAP Revenues are recognized when they are earned and expenses are recognized when they are incurred , regardless of the timing of cash receipts or payments.

Business delivers goods or services.

Cash is received in the same period as the goods or services are delivered.

Revenue is recorded here. Time Recording Revenues versus Cash Receipts

Cash is received before the goods or services are delivered.

Cash is received after the goods or services are delivered.

here (2) here (3) here (1) Cash can be received . . .

Business delivers goods or services. Cash can be received . . . Revenue is recorded here. Time Recording Revenues versus Cash Receipts here (2) here (1) here (3)

Cash is received in the same period as the goods or services are delivered.

Cash is received before the goods or services are delivered.

Cash is received after the goods or services are delivered.

Business delivers goods or services. Revenue is recorded here. Time When cash is received before goods or services are delivered, the company receiving the cash will report an increase in cash and an increase in a liability, called unearned revenue , which represents the obligation to perform the acts in the future. Recording Revenues versus Cash Receipts here (2) here (1) here (3) Cash can be received . . .

Cash is received in the same period as the promised acts are performed.

Cash is received in a period before the promised acts are performed.

Cash is received in a period after the promised acts are performed.

Business delivers goods or services. Revenue is recorded here. Time When cash is received after goods or services are delivered, the company performing the services will report an increase in revenue and an increase in accounts receivable. Later, when the cash is received, the accounts receivable is reduced. Recording Revenues versus Cash Receipts here (2) here (1) here (3) Cash can be received . . .

Cash is received in the same period as the promised acts are performed.

Cash is received in a period before the promised acts are performed.

Cash is received in a period after the promised acts are performed.

Business incurs costs to generate revenues. Cash can be paid . . .

Cash is paid at the same time as the expense is incurred to generate revenue.

Expense is recognized here. Time Recording Expenses versus Cash Payments

Cash is paid before the expense is incurred to generate revenue.

Cash is paid after the expense is incurred to generate revenue.

here (2) here (1) here (3)

Business incurs costs to generate revenues. Cash can be paid . . . Expense is recognized here. Time Recording Expenses versus Cash Payments

Cash is paid at the same time as the expense is incurred to generate revenue.

Cash is paid before the expense is incurred to generate revenue.

Cash is paid after the expense is incurred to generate revenue.

here (2) here (1) here (3)

Business incurs costs to generate revenues. Expense is recognized here. Time Recording Expenses versus Cash Payments Given the matching principle, the expense should be reported when the cost is incurred to earn revenue and not in the period when the cash is paid. here (2) here (1) here (3) Cash can be paid . . .

Cash is paid at the same time as the cost is incurred to generate revenue.

Cash is paid before the the cost is incurred to generate revenue.

Cash is paid after the the cost is incurred to generate revenue.

Business incurs costs to generate revenues. Expense is recognized here. Time Recording Expenses versus Cash Payments Given the matching principle, the expense should be reported when the cost is incurred to earn revenue and not in the period when the cash is paid. here (2) here (1) here (3) Cash can be paid . . .

Cash is paid at the same time as the cost is incurred to generate revenue.

Cash is paid before the the cost is incurred to generate revenue.

Cash is paid after the the cost is incurred to generate revenue.

Unadjusted Trial Balance Amounts come from ledger balances Not a financial statement Debits = Credits Listed in financial statement order

Classified Income Statement Operating revenues result from the sale of goods and services. Operating expenses are the costs that are directly related to the generation of operating revenues. Other items include peripheral transactions such as interest and dividends.

Limitations of the Income Statement NI  Cash NI   Value NI  Counting