LEARNING OBJECTIVES

1. Identify the accounts to be presented in an

Income Statement;
2. Enumerate the accounting principles related
to the income and expenses;
3. Explain the different forms of Income
Statements according to nature of business;
and
4. Prepare an actual Income Statement for
Service Business;
INCOME STATEMENT

• Moving picture of entity’s operations

• Shows the results of operations for a
particular period of an enterprise
• Presents revenues and expenses, and the
resulting net income or net loss for a specific
period of time
• Reflects the financial performance
• Also known as the Statement of Operations,
Earning Statement or Profit and Loss
Statement.
• Revenues are listed first, then followed by
Expenses
• They are presented in “order of magnitude”.

ELEMENTS OF INCOME STATEMENTS

REVENUE
ü Represents the Earnings of the business from the sale of
good or services rendered.
ü Inflows of future economic benefits that increases
equity, other than contribution of owner.

INCOME RECOGNITION PRINCIPLE

Income shall be recognized only when earned. It is considered
“earned” when:
1. It is probable that future economic benefits will flow to the
entity as result of an increase in asset or decrease in liability;
and
2. The economic benefits can be measured reliably.
ELEMENTS OF INCOME STATEMENTS
SOURCES OF REVENUE

1. Sales of merchandise to customers

2. Rendering services
- Service Income like Professional fees,
Medical Fees, Legal Fees, Dental Fees,
Accounting Fees

3. Use of entity’s resources

- Interest income, rent, dividend, royalty
other income
4.Disposal of resources other than
products/services like gains on sale of
property, etc.

ELEMENTS OF INCOME STATEMENTS

EXPENSES
ü Represent Costs incurred in conducting the business
activities.
ü Outflows of future economic benefits that decrease
equity, other than withdrawal by the owner.

EXPENSE RECOGNITION PRINCIPLE

Expenses shall be recognized only when incurred. It is
considered “incurred” when:
1. It is probable that a decrease in future economic benefits has
occurred as a result of decrease in asset or increase in
liability; and
2. The decrease in economic benefits can be measured reliably.
ELEMENTS OF INCOME STATEMENTS
EXPENSES, examples:
1. Supplies Expense – the amount of supplies used or consumed like
papers, inks, ball pen, etc.
2. Rent Expense – cost of office space used by a business in its
operations
3. Transportation Expense – cost of incurred when relating to transport
fares of employees and owner chargeable to the business
4. Representation Expense – cost incurred when entertaining clients or
prospective clients
5. Advertising Expense – cost of promoting the services offered by the
business.
6. Taxes & Licenses – payment of taxes and City Hall for business taxes
and permits
7. Gasoline & Oil – cost of gasoline and oil consumed by transportation
vehicles used in official business trip.
8. Doubtful Accounts Expense – estimated uncollectible account
receivable considered as bad debts expense.
9. Depreciation Expense – allocable expired cost of assets over its
estimated useful life.

ELEMENTS OF INCOME STATEMENTS

For Merchandising Business:

Distribution Costs –costs directly related to selling, advertising
and delivery of goods to customers.
-E.g. salesmen’s commission, sales commission, traveling and
marketing expense, depreciation expense of delivery
equipment.

Administrative Expenses – costs of administering the business

like office salaries, professional fees, taxes, etc.

EXPENSES, Other Classifications:

Other Expenses – those not directly related to the selling
and administrative functions, or do not fall under any of
the given expenses like Loss on Sale of Property.
Finance Cost – cost related to borrowings like Interest
Expense.
FORMS OF INCOME STATEMENTS

NATURAL FORM (SINGLE STEP)

ü Only one step is involved, subtracting total

expenses from total revenues in determining
net income or net loss.
ü Where Revenues category includes (a)
Operating Revenue and (b) Other Revenues
and gains
ü Where Expenses category includes (a)
Operating Expenses and (b) Other Expenses.

Illustration – Income Statement (Service

Business) SINGLE STEP IS
Illustration – Income Statement (Service
Business) SINGLE STEP IS

FORMS OF INCOME STATEMENTS

FUNCTIONAL FORM (MULTIPLE STEPS)

ü Shows specific sections of income, costs and

expenses in a series of arithmetic operations.
ü Where cost of goods sold and expenses in
multiple steps to arrive at Net income or net
loss.
ü Used by trading and manufacturing companies.
ü It also distinguishes operating and non-
operating activities to provide users of
information about the enterprise’s
performance.
FUNCTIONAL FORM - Illustration

FUNCTIONAL FORM - Illustration

FUNCTIONAL FORM - Illustration

STATEMENT OF CHANGES IN OWNER’S EQUITY

-Summarizes the changes in owner’s equity for a

specific period of time.

-Also known as “Capital Statement”

-This accounts for the excess of Assets over

Liabilities of a business.

-It is increased by Additional Investment and Net

Income resulting from business operations.

-It is decreased by Owner ’ s withdrawals and Net

Loss resulting from business operations.
STATEMENT OF CHANGES IN OE

INVESTMENT

ü Synonymous to Capital.
ü The amount of money or value of property put
into the business.
ü Types:
1. Initial Investment – amount of money or
value of property initially put to business to
finance the start of operations.
2. Additional Investment – additional money
or value of property put in the business
during operation.

STATEMENT OF CHANGES IN OE

WITHDRAWALS
ü The amount of money or value of property
taken from the business for personal use.
ü Types:
1. Temporary Withdrawal – amount of money
or value of property taken for personal use
by the owner in the regular conduct of
business.
2. Permanent Withdrawal – substantial
amount with intention to remove the asset
permanently from the business and to
sooner dissolve or liquidate the operation.
ILLUSTRATION

ILLUSTRATION

The following information were taken from the books of JVL Service Enterprise:

December 31, 2020 December 31, 2021

Total Assets Php 1,875,325 Php 2,768,098

Total Liabilities 897,345 1,542,090

Mr. J.V. Laurel made an additional investment on September 1, 2021 amounting to Php
345,000 and the business operation had a favorable result for the year 2021 of Php
525,800.

1. How much is the withdrawal of Mr. Laurel, if there is any? P622,722

2. How much is the Mr. Laurel Capital End? P1,226,008

End of Discussion