BUSS1030 Lecture Notes - Lecture 7: Income Statement, Matching Principle, Accounting Equation
17 May 2018
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The statement of financial performance- its nature and purpose, and its relationship with the statement
of financial position!"
-#The purpose of the income statement is to measure and report how much profit the business has
generated over a period.!"
-#Profit/ Loss is the difference between the increases in the owner's equity, known as income and
the decreases in owner's equity known as expenses!"
-#Income is made up of revenue(from operating activities) and other gains (usually from non-
operating activities)!"
-#Expenses is the outflow of assets (or increase in liabilities) incurred as a result of generating
revenues!"
-#The 2 are closely related but are not substitutes!"
-#The statement of financial performance can be viewed as linking the statement of financial
position at the start of a period with that at the end of the period!"
Accounting equation extended EP!"
Assets(end) = Liabilities(end) + OE(beg) + Profit(or - loss) + Contributions - Drawings or Dividends!"
Key Terms!"
-#Gross Profit: difference between the revenues from sales and the cost of those sales !"
-#Operating Profit: the increase in wealth for a period that is generated from normal operations!"
-#Profit for the period: the profit for the year after a reasonable estimate of tax likely for the year!"
-#Cost of sales: cost attributable to the sales revenue !"
Classified Reports!"
-#Income is normally broken down into sales and other revenues!"
-#Expenses are often broken down into four categories!"
1.#Cost of sales!"
2.#Selling and distribution!"
3.#Administration and general!"
4.#Financial!"
The reporting period!"
-#External reporting: Reporting cycle is normally one year!"
-#Internal functions: Common for profit figures to be prepared on a monthly basis!"
Profit measurement and the recognition of expenses !"
-#Expenses measure the outflow of assets or the increase in liabilities that result from trading and
generating revenues!"
-#Matching principle: Expenses should be matched to the income they helped generate!"
o#The cash payments are the same as the expenses incurred!"
o#The cash payments are less than the expenses incurred!"
o#The cash payments exceed the expenses incurred!"
-#Manual adjustments are sometimes required for !"
o#Accrued expenses!"
o#Prepayments!"
o#Depreciation!"
Recognition of revenues!"
-#Key issue in the measurement of profit concerns the point at which income is recognised!"
-#It is possible to recognise income at different points in the production/selling cycle!"
-#Criteria for recognising revenue!"
o#The amount of revenue can be measure reliably!"
o#Probable that the economic benefit will be received!"
-#Criteria for revenue that comes from sale of goods!"
o#Ownership and control of the items should pass to the buyer!"
-#some contracts can last for more than one reporting period, they may be broken down into stages
for recognition!"
-#if a breakdown is not possible, then revenue will not be recognised before the cash is received!"
-#cash may be received in advance of revenue being recognised e.g. cash deposit!"
Document Summary
The purpose of the income statement is to measure and report how much pro t the business has. Pro t/ loss is the di erence between the increases in the owner"s equity, known as income and. Income is made up of revenue(from operating activities) and other gains (usually from non- Expenses is the out ow of assets (or increase in liabilities) incurred as a result of generating. The 2 are closely related but are not substitutes. The statement of nancial performance can be viewed as linking the statement of nancial. Gross pro t: di erence between the revenues from sales and the cost of those sales. Operating pro t: the increase in wealth for a period that is generated from normal operations. Pro t for the period: the pro t for the year after a reasonable estimate of tax likely for the year. Cost of sales: cost attributable to the sales revenue.
