Statement of Comprehensive

Income
Comparison of Income Statements for Service and
Merchandising Company
Statement of Comprehensive Income for Service
Company
Service Income- revenues earned by performing services for a customer or client.
Expenses:
● Salaries or Wages Expense
● Telecommunications, Electricity, Fuel and Water Expenses
● Rent Expense
● Supplies Expense
● Insurance Expense
● Depreciation Expense
● Uncollectible Accounts Expense
● Interest Expense
Composition of Merchandising Income Statement
Net Sales
Gross Sales
Under accrual accounting, revenues from the sale of merchandise are considered
to be earned in the accounting period in which the title of goods passes- usually at
the point of delivery- from the seller to the buyer. Gross sales consist of total sales
for cash and on credit during an accounting period.

The journal entry to record the sale of merchandise for cash is as follows:
Cash xxx

Sales xxx

If the sale of merchandise is made on credit, the entry will be:

Accounts Receivable xxx

Sales xxx
Sales Discounts
Assume that T. Calaguas Trading sold merchandise on Sept.20 for P3,000; terms
2/10, n/60. At that time of sale, the entry is:

Accounts Receivable 3,000

Sales 3,000

The customer may take advantage of the sales discount any time on or before Sept
30, which is 10days after the date of the invoice. If the client paid on Sept 30 , the
entry is:
Cash 2,940

Sales Discounts 60

Accounts Receivable 3,000

Sales Return and Allowances
Buyers may be dissatisfied with the merchandise received either because the goods
are damaged or defective. In such cases, the buyer may return the goods to the seller
for credit if the sale was made on account or for cash refund if the sale was for cash.

Sales Returns and Allowances 760

Accounts Receivable (Cash) 760

Transportation Cost
● The freight bill designates which party shoulders the cost and weather the
shipment is freight prepaid or freight collect.
● Freight bills usually show whether the shipping terms are FOB shipping point
or FOB destination point. FOB means “free on board”.
● FOB shipping point- the buyer shoulders the shipping costs; ownership over the
goods passes from seller to the buyer when the inventory leaves the seller’s
place.
● FOB destination point- the seller bears the shipping cost; Title passes only
when the goods are received by the buyer at the point of destination.
● Freight prepaid- the seller pays the transportation costs before shipping the
goods
● Freight collect- The freight company collects from the buyer.

Freight Terms Who shoulders Who pays the shipper?

the transportation
costs?

FOB Destination, Freight Prepaid seller seller

FOB shipping point, freight collect buyer buyer

FOB destination, Freight collect seller buyer

FOB Shipping Point, Freight prepaid buyer seller

Transportation Out
Case 1

Assume that T. Calaguas Traders sold merchandise totalling P17,000 FOB

destination, freight prepaid, terms 2/10, n/30. The transportation costs amounted
to P1,900.

Accounts Receivable 17,000

Transportation Out 1,900

Sales 17,000

Cash 1,900
Case no. 2

Assume that T. Calaguas Traders sold merchandise totalling P17,000 FOB shipping
point, freight collect; terms 2/10, n/30.

Accounts Receivable 17,000

Sales 17,000
Case 3

Now, assume that T. Calaguas Traders sold merchandise totalling P17,000 FOB
destination, freight collect; terms 2/10, n/30.

Accounts Receivable 15,100

Transportation Out 1,900

Sales 17,000
Case no. 4

Assume further that T. Calaguas Traders sold merchandise totalling P17,000 FOB
shipping point, freight prepaid; terms 2/10, n/30. The transportation costs
amounted to P1,900.

Accounts Receivable 18,900

Sales 17,000

Cash 1,900
Cost of Sales
Net Cost of Purchases
Purchases - a temporary account, is used only for merchandise purchased for resale.

Purchases xxx

Accounts Receivable xxx

Purchases returns and allowances- is a contra account and is
accordingly deducted from purchases in the income statement.

Accounts Payable xxx

Purchases Returns and Allowances xxx

Purchases Discount- merchandise purchases are usually made on credit and
commonly involve purchases on discounts for early payment.

Accounts Payable xxx

Purchases Discount xxx

Cash xxx
Transportation In
Case no 1: Assume that T. Calaguas Traders made purchases totalling P17,000
FOB destination, freight prepaid; terms 2/10, n/30. Transportation costs amounted
to P1,900.

Purchases 17,000

Accounts Payable 17,000

Case 2 FOB shipping point, freight collect

Purchases 17,000

Transportation In 1,900

Accounts Payable 17,000

Cash 1,900
Case 3 FOB Destination, freight collect

Purchases 17,000

Accounts Payable 15,100

Cash 1,900
Case no 4 FOB shipping point, freight prepaid.

Purchases 17,000

Transportation In 1,900

Accounts Payable 18,900

Operating Expenses
● These are expenses other than the cost of sales.
● Divided into distribution costs, administrative expenses, and other operating
expenses

Distribution Costs or selling expenses- those expenses related directly to the entity’s
efforts to generate sales. These includes the sales salaries and commissions, and the
related employer payroll expenses; advertising and store displays; traveling
expenses; store supplies used; depreciation of store property and equipment and
transportation out.
Administrative Expenses- include the officers and office salaries and the related
employer payroll expenses, office supplies used depreciation of office property and
equipment, business taxes, professional services, uncollectible accounts expense and
other general office expenses.

Other operating expenses- loss on sale of property and equipment.

Sample Problem
Cost of Goods Sold
● For trading operations, Cost of Sales collects the cost of merchandise sold.
● It includes the price of inventory, brokerage, and shipment cost to bring the
goods to the premises of the company.

Beginning Inventory

Add: Net Purchases ( Purchases + Freight In - Purchase Returns - Purchase Discount)

Cost of Goods Available for Sale

Less: Ending Inventory

Cost of Goods Sold

Sample Problem
Single Step Statement of Comprehensive Income
● Groups all revenue items together and all expenses item together.
● Net Income = (Revenue + Gain ) - (Expenses + Loss)
Multi-Step Statement of Comprehensive Income
A multi-step income statement reports much of the same general information included in a single-step
income statement, but it uses multiple equations to determine the net income, or profit, of the company.

The multi-step income statement uses three different accounting formulas to arrive at the net income:

1.GROSS PROFIT = NET SALES – COST OF GOODS SOLD (Cost of goods sold
is subtracted from net sales. This gives the gross profit.)

2. OPERATING INCOME = GROSS PROFIT – OPERATING EXPENSES

(Operating expenses are subtracted from gross profit. This gives you the operating
income.)

3. NET INCOME = OPERATING INCOME + NON-OPERATING ITEMS

(Operating income is added to the net non-operating revenues, gains, expenses and
losses. This final figure gives the net income or net loss of the business for the
reporting period.)