Income Statement

Income Statement

Key Things To Know

The income statement reports the performance (earnings) of the company during a specific period of time.

A business operates to provide goods or services to customers at a higher price to the customer (revenues) than it costs the business to provide the goods or service (expense.) The difference is called “income”.

Revenue:

Goods or services are provided to customers in return for an asset

The “revenue recognition principle” requires revenue to be reported on the income statement during the period it is EARNED; which occurs when:

1) Delivery of goods has occurred or a service has been provided and nothing is owed to the customer (performance obligation is met),

and

2) The company expects the customer to pay the company amounts the company is entitled to receive.

Important:
Revenue is reported in the period the goods or services are provided to the customer who is expected to pay for the goods or services, NOT when cash is received.

Expense:

An expense is reported on the income statement during the period it is INCURRED; which occurs when:

1) a service is provided to the company that must be paid for

or

2) an asset is used (up) to provide goods or services to customers

Important: The expense is reported in the period the company receives the service or the asset is used up, NOT when the company pays for the service or asset.

Gains:
Sell an asset and receive more for the asset than the amount the asset was reported on the balance sheet.

Losses:
Sell an asset and receive less for the asset than the amount the asset was reported on the balance sheet.