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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 t…

Accounting Equation

Assets = Liabilities + Owner's Equity

Accrual Basis of Accounting

Under the accrual basis of accounting, the cost of goods sold and expenses are matched to sales and/or the accounting period when they are used, not the period in which they are paid.

Income Statement Information

The income statement or profit and loss statement shows revenues earned, expenses incurred, gains, and losses.

The income statement does not show cash receipts and cash disbursements.

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.)


Earned at the time of service


Earned when payment is made, often at a different time from the actual service

What does the December IS show?

expenses incurred during December regardless of when the company actually paid for the expenses

Net Sales-COGS=

gross profit
multiple step IS

Selling Exp + Admin Exp=

operating expenses

Gross Profit - Operating Exp=

Operating Income

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