Income statement or Profit & Loss Account

Transcript:Income statement or Profit & Loss Account:
Income statement or Profit & Loss Account Revenues: Inflows (creation) of assets- cash or accounts receivable- that result from the sale of goods and services to customers Expenses: Outflows (consumption) of resources that were required in order to generate these revenues What is profit then ? Net Income is more formally used 3-5 Basic Concepts (This Session) Accounting period. Conservatism. Realization. Matching. Consistency. Materiality. Accounting period concept Net income for the entire duration of the firm is easy to measure, but? Measures activities for a specified period of time called accounting period Remember Revenue is an increase in retained earnings, expense is a decrease Revenues- Expense= Net income Income not the same as increase in cash The conservatism concept Recognizes revenues (increase in retained earnings) only when they are reasonably certain. Recognise expenses (decrease in retained earnings) as soon as they are reasonably possible In nutshell, anticipate all losses, not gains Application to revenue recognition Pre collected revenue Accounts receivable Realization concept Amount of revenue that should be recognized from sale Rvenue can only be recognized after it has been earned. E.g., Advance payment for goods. A customer pays $1,000 in advance for a custom-designed product Matching concept Requires that the expenses incurred during a period be recorded in the same period in which the related revenues are earned A salesman earns a 5% commission on sales shipped and recorded in January. The commission of $5,000 is paid in February When the expense will recognize ? January Like wise depreciation also Consistency concept Materiality concept Accrual vs Cash Basis The table below summarizes the broad difference between the two method: Why Profit and Loss Account The profits are the compensation derived by an entrepreneur for the capital invested and risks incurred in running a firm. It is a major financial statement showing a company’s earnings and expenses over a given period of time. The profit and loss account is a part of the final accounts drawn up at the end of the accounting period. Profits earned are also one of the chief indicators of the efficiency of a business. Measurement of Income Comparing the revenue from sales against the cost of resources parted with for earning that revenue. The net difference in this comparison, represents the net income or profit. Identify realized revenues Identify related costs Match identified revenues and expired costs Determination of Net Profit (Loss) Accrual Principle It