MEASUREMENT OF

BUSINESS INCOME, AND

DETERMINATION OF
PROFIT OR LOSS FOR
TRADING OPERATIONS
NUR SHAHIDA AB FATAH

BP12103 PRINCIPLES OF ACCOUNTING

FACULTY OF BUSINESS, ECONOMICS AND ACCOUNTANCY

UNIVERSITI MALAYSIA SABAH

LEARNING OUTCOMES
At the end of this module, students should be able to:

1. Explain the measurement of business income (definition,

recognition and measurement)

2. Identify the components in measuring net profit or net loss in a

trading business.

3. Compute the cost of goods sold, gross profit and net profit

4. Construct the income statement of a trading business.

  Defined by Revised Conceptual Framework for Financial
Reporting (2018), income is increases in economic
benefits during the accounting period in the form of inflow
or enhancement of assets or decreases of liabilities that
result in increases in equity, other than those relating to
contributions from equity participants.
INCOME
 Revenue is income that results from the ordinary
activities of a business. Ordinary activities refer to the
main business activities of a business in form of sale of
goods, or rendering of services to customers

 also referred as sales revenue, or sales, or turnover

  Defined by Revised Conceptual Framework for
Financial Reporting (2018), expenses are decreases in
assets, or increases in liabilities, that result in
decreases in equity, other than relating to distributions
to holders of equity claims.
EXPENSES
 Two types of expenses:
Revenue expenditure; and
Capital expenditure
 Revenue expenditure
• is incurred in running the
business on a day-to-day
basis (utilities, salary etc.)
• The benefits are charged to
the current accounting
period (is charged to profit
or loss accounts)
Capital expenditure
• is incurred when a business
spends money either to:
 Buy non-current assets; or
 Add to the value of an existing
non-current asset;
 Increase value of non-current
assets in the SOFP.
• The benefits are charged to
several accounting periods.
RECOGNITION

 Is recognized only when is it probable

REVENUE that the economic benefits associated
with the transaction will flow to the entity.

 When there is a decrease in future

economics benefits which is related to a
EXPENSES decrease in an asset, or an increase in a
liability.
MEASUREMENT
 Accrual Basis − income is recognised in a company’s
books at the time when revenue is earned, and
expenses is recorded when liabilities are incurred.
Basis of
measurement  Cash Basis − In a cash basis accounting, revenues
and expenses are recognised at the time of physical
cash is received or paid out.

 Historical Costs − amount that is originally paid to

acquire the asset.
Measurement
of Cost  Replacement Costs − Replacing any asset at the
current market price is called as replacement cost.
MEASUREMENT
 Accrual Basis − income is recognised in a company’s
books at the time when revenue is earned, and
expenses is recorded when liabilities are incurred.
Basis of
measurement  Cash Basis − In a cash basis accounting, revenues
and expenses are recognised at the time of physical
cash is received or paid out.

 Historical Costs − amount that is originally paid to

acquire the asset.
Measurement
of Cost  Replacement Costs − Replacing any asset at the
current market price is called as replacement cost.
DETERMINATION OF PROFIT OR LOSS FOR
TRADING OPERATIONS
Link: Financial statements
TRADE DISCOUNTS
 Given as a reduction from the selling price.
 To encourage purchase of goods in large quantity (bulk
purchase).
 The larger the quantity purchased, the greater the trade
discount offered.
 Trade discounts is deducted before any exchange takes
place, it does not form part of the accounting transaction,
and is not entered into the accounting records of business.
CASH DISCOUNTS
 Given or received to encourage early payment.
 Two types:
 Discount allowed/Sales discount
• Treated as operating expenses
 Discount received/Purchase discount
• Treated as other revenues
 Called as cash discounts because only arise at the time of
payment.
 Cash discounts will be recorded in the journals and ledgers.
 For example, credit terms stated as ‘2/10, n/30’ (which is
read ‘two-ten, net thirty).
THANK YOU.