LESSON 7-1

Preparing an
Income Statement

Original created by M.C. McLaughlin, Thomson/South-Western

Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

CENTURY 21 ACCOUNTING © Thomson/South-Western

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Preparing an Income Statement

 To make the general ledger information more usable, the
information is summarized, organized, and reported to the
owners & managers in the form of financial statements

 When financial statements contain all information

necessary to understand a business’s financial condition
the accounting concept adequate disclosure is applied.

 The accounting concept Going Concern is applied when

financial statements are prepared with the expectation that
a business will remain in operation indefinitely

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1

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Preparing an Income Statement

 An income statement reports financial information over a
specific period of time, indicating the financial progress of a
business in earning a net income or a net loss.
 The income statement for a service business has 4 sections:
 Heading
 Revenue
 Expenses
 Net income or Net loss

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1

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INCOME STATEMENT INFORMATION ON A

WORK SHEET page 182

Information for preparing an income statement is obtained from

two places on the work sheet.
Account titles are obtained from the work sheet’s Account
Title column
Account balances are obtained from the work sheet’s Income
Statement columns

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1

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HEADING OF AN INCOME STATEMENT page 182

1
2
3

1. Center the name of the company on the first line.

2. Center the name of the report on the second line.
3. Center the date of the report on the third line.

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1

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REVENUE, EXPENSES, AND NET INCOME

SECTIONS OF AN INCOME STATEMENT page 183
7 Single line

Revenue 1
2 Account title 3 Revenue amount
Expenses 4

Account titles 5 6 Expense amount

Total expenses 8 9 Total of expenses

12 Net Income
11 Single line
14 Double lines
13 Record net income
10 Calculate net income

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1

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COMPONENT PERCENTAGE ANALYSIS OF

AN INCOME STATEMENT
For a service business, the revenue reported on an income statement
includes 2 components:
total expenses
Net income
The percentage relationship
between one financial statement
item & the total that includes
that item is called a component
percentage.
Component percentages
These percentages are analyzed to
are calculated by dividing
help managers make future decisions
the amount of each
about operations of the business
component by the total
amount of sales
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1
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COMPONENT PERCENTAGE ANALYSIS OF

AN INCOME STATEMENT page 184

For a component % to
be useful, the business
needs to know what
component percentages
are acceptable for similar
businesses.
Industry organizations
publish average
percentages for similar
businesses

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1

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INCOME STATEMENT WITH TWO

SOURCES OF REVENUE AND A NET LOSS
If a business receives revenue from more than one source, both
revenue accounts are listed.

If total expenses
exceed total revenue,
a net loss is reported
on an income
statement.

Net Loss

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1

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INCOME STATEMENT WITH TWO SOURCES OF

REVENUE AND A NET LOSS page 185

5 Total Revenue

Revenue 1
Account titles 2 3 Revenue amounts

4 Total of revenue

Net Loss 6

7 Record Net Loss

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1

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TERMS REVIEW page 186

 stakeholders
 component percentage

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 7-1