34 terms

Accounting

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Income Statement
a document showing credits and debits, how PROFITABLE it was during a specific unit of time. Includes REVENUES and EXPENSES.
Revenues
Under Accrual basis of Accounting: revenues are recorded when they are EARNED, not just given. Although a payment date may be required for the following month, the revenue is counted toward the time when the amount was actually earned based on a service provided. When the payment is actually made, it will be a reduction in accounts receivable.
Revenue recognition principle
The accounting guideline requiring that revenues be shown on the income statement in the period in which they are earned, not in the period when the cash is collected. This is part of the accrual basis of accounting (as opposed to the cash basis of accounting).
Accrual Basis of Accounting
The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service).

Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in Cash (if the expense was paid at the time the expense was incurred), an increase in Accounts Payable (if the expense will be paid in the future), or a decrease in Prepaid Expenses (if the expense was paid in advance).
Accounts Receivable
A current asset resulting from selling goods or services on credit (on account). Invoice terms such as (a) net 30 days or (b) 2/10, n/30 signify that a sale was made on account and was not a cash sale.
Expenses
Should show when expenses incurred not just when the company actually paid for the expenses.
Matching Principle
The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense.
Interest Expense
This account is a non-operating or "other" expense for the cost of borrowed money or other credit. The amount of interest expense appearing on the income statement is the cost of the money that was used during the time interval shown in the heading of the income statement, not the amount of interest paid during that period of time.
Income Statement
1) report the revenues earned by the company's efforts during the period, and (2) report the expenses incurred by the company during the same period. The purpose of the income statement is to show a company's profitability during a specific period of time. The difference (or "net") between the revenues and expenses for Direct Delivery is often referred to as the BOTTOM LINE and it is labeled as either Net Income or Net Loss.

A. Revenues and Gains
1. Revenues from primary activities
2. Revenues or income from secondary activities
3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits)

B. Expenses and Losses
1. Expenses involved in primary activities
2. Expenses from secondary activities
3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)
Net Income
This is the bottom line of the income statement. It is the mathematical result of revenues and gains minus the cost of goods sold and all expenses and losses (including income tax expense if the company is a regular corporation) provided the result is a positive amount. If the net amount is a negative amount, it is referred to as a net loss.
Net Loss
The bottom line of the income statement when revenues and gains are less than the aggregate amount of cost of goods sold, operating expenses, losses, and income taxes (if the company is a regular corporation).
Primary Activities
For a retailer, wholesaler, and distributor the primary activities would be the buying of merchandise and then the sale of that merchandise. A manufacturer's primary activities would be the production and sale of products.
Secondary Activities
Also referred to as peripheral activities. A company's activities outside of its main activities of buying/producing and selling. Examples include a retailer's financing function involving interest revenue and interest expense, disposal of long term assets used in the business, lawsuit settlements, renting out unused space, etc.
Revenues from Primary Activities (operating revenues)
are often referred to as operating revenues. The primary activities of a retailer are purchasing merchandise and selling the merchandise. The primary activities of a manufacturer are producing the products and selling them. For retailers, manufacturers, wholesalers, and distributers the revenues generating from their primary activities are referred to as sales revenues or sales. The primary activities of a company that provides services involve acquiring expertise and selling that expertise to clients. For companies providing services, the revenues from their primary services are referred to as service revenues or fees earned.
Receipts
Cash received. Receipts are different from revenues.
Expenses Involved in primary activities
Expenses that are incurred in order to earn normal operating revenues. Under the accrual basis of accounting sales commissions expense should appear on the income statement in the same period that the related sales are reported, regardless of when the commission is actually paid.
Expenses from secondary activities
are referred to as nonoperating expenses. For example, interest expense is a nonoperating expense because it involves the finance function of the business, rather than the primary activities of buying/producing and selling.
Losses
such as the loss from the sale of long-term assets, or the loss on lawsuits result from a transaction that is outside of a business's primary activities. A loss is reported as the net of two amounts: the amount listed for the item on the company's books (book value) minus the proceeds received from the sale. A loss occurs when the proceeds are less than the book value.
Cost Principle
The accounting guideline requiring amounts in the accounts and on the financial statements to be the actual cost rather than the current value. Accountants can show an amount less than cost due to conservatism, but accountants are generally prohibited from showing amounts greater than cost. (Certain investments will be shown at fair value instead of cost.)
Net Income
(Revenues+gains)-(Expenses+losses)
Statement Heading
The heading of the income statement conveys critical information. The name of the company appears first, followed by the title "Income Statement." The third line tells the reader the time interval reported on the profit and loss statement. Since income statements can be prepared for any period of time, you must inform the reader of the precise period of time being covered. (For example, an income statement may cover any one of the following time periods: "Year Ended May 31," "Five Months Ended May 31," "Quarter Ended May 31," "Month Ended May 31, or "Five Weeks Ended May 31".)
Sample Income Statement
A sample income statement in the single-step format would look like this:

Sample Products Co.
Income Statement
For the Five Months Ended May 31, 2012

Revenues & gains
Sales revenues $100,000
Interest revenues 5,000
Gain on sale of assets 3,000
Total revenue & gains 108,000

Expenses & losses
Cost of goods sold 75,000
Commissions expense 5,000
Office supplies expense 3,500
Office equipment expense 2,500
Advertising expense 2,000
Interest expense 500
Loss from lawsuit 1,500
Total expenses & losses 90,000

Net income $ 18,000
Multiple-step income statement
it uses multiple subtractions in computing the net income shown on the bottom line.

The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold).
Multiple Step income statement STEP 1
Cost of goods sold is subtracted from net sales to arrive at the gross profit.

Gross profit
=
Net sales
-
Cost of goods sold
Gross profit
=
$100,000
-
$75,000
Gross profit
=
$25,000
Multiple Step income statement STEP 2
Operating expenses are subtracted from gross profit to arrive at operating income.

Operating income
=
Gross profit
-
Operating expenses
Operating income
=
$25,000
-
$13,000
Operating income
=
$12,000
Multiple Step income statement STEP 3
The net amount of nonoperating revenues, gains, nonoperating expenses and losses is combined with the operating income to arrive at the net income or net loss.

Net income
=
Operating income
+
Non-operating items
Net income
=
$12,000
+
$6,000
Net income
=
$18,000
Gross Margin
A term that is sometimes used interchangeably with gross profit. Others use the term to mean the percentage of gross profit dollars divided by net sales dollars.
Rare income statement items
1. Discontinued operations pertains to the elimination of a significant part of a company's business, such as the sale of an entire division of the company. (Eliminating a small portion of product line does not qualify as a discontinued operation.)


2. Extraordinary items includes things that are unusual in nature and infrequent in occurrence. A loss due to an earthquake in Wisconsin would certainly be extraordinary. A loss due to a foreign country taking over a U.S. oil refinery in that country would be an extraordinary item.
Contribution Margin
The result of subtracting all variable expenses from revenues. It indicates the amount available from sales to cover the fixed expenses and profit.
Assets
Assets are things that a company owns and are sometimes referred to as the resources of the company
*Vehicles, Cash, Supplies, and Equipment
Prepaid expenses
A current asset representing amounts paid in advance for future expenses. As the expenses are used or expire, expense is increased and prepaid expense is decreased.
Insurance expense
The amount of insurance that was incurred/used up/expired during the period of time appearing in the heading of the income statement. The amount of insurance premiums that have not yet expired should be reported in the current asset account Prepaid Insurance.
Depreciation Expense
The income statement account which contains a portion of the cost of plant and equipment that is being matched to the time interval shown in the heading of the income statement. (There is no depreciation expense for land.)
Carrying Amount
Also referred to as book value or carrying value; the cost of a plant asset minus the accumulated depreciation since the asset was acquired. This net amount is not an indication of the asset's fair market value. Also used in reference to bonds payable: the face amount in Bonds Payable plus Premium on Bonds Payable or minus Discount on Bonds Payable and minus the unamortized issue costs.