Module

2 TNHS Main_SHS_Accountancy, Business and Management

Statement of Comprehensive Income (SCI)

The INCOME STATEMENT

The Statement of Comprehensive Income, aka INCOME STATEMENT, is a financial statement
which summarizes the profitability of the business entity over a specified period of time.
It reports the entity’s financial performance and results of operation in terms of net income
(profit) or loss over a specified period.

In this statement, Net Income is determined by comparing for the time period:
1) the sales price of the goods sold and services rendered by the business with
2) the cost to the business of the goods and services used up in business operations.
The technical accounting terms for these components of net income are revenue and expenses.
Therefore, accountants say that net income is equal to revenue minus expenses.

Temporary Accounts
The revenue, expense and drawing accounts are called temporary accounts, or NOMINAL
accounts, because they accumulate the transactions of only one accounting period. At the end
of this accounting period, balances under these accounts are transferred to the capital account.
This process serves two purposes:
1) It updates the balance of the owner’s capital account for changes in owner’s equity
occurring during the accounting period.
2) It returns the balances of the temporary accounts to zero , so that they are ready for
measuring the revenue, expenses and drawings of the next accounting period.

The process of transferring the balances of the temporary accounts into the owner’s permanent
capital account is called closing the accounts.
The journal entries made for the purpose of closing the temporary accounts are called closing
entries.
 ABM ENTERPRISES
Statement of Comprehensive Income
For the month ended August 31, 2017

Revenue:
Service revenue P 100,000.00

Expenses:
Salaries expense P 40,000.00
Rent expense 20,000.00
Depreciation expense - building 10,000.00
Utilities expense 5,000.00
Miscellaneous expense 1,000.00 76,000.00

Net Income (Net Loss) P 24,000.00

Accounting Periods
The period of time covered by an income statement is termed the company’s accounting
period.
The 12-month accounting period used by an entity is called the fiscal year, which ends on some
other date.
While, the calendar year ends on December 31.

REVENUE
Revenue is the price of goods and services rendered during a given accounting period.
Various terms are used to describe different types of revenue:
- the revenue earned by a real state broker might be called Sales Commissions Earned or
Commission Revenue.
- In professional practice of lawyers, CPAs, physicians, the revenue is called Fees Earned.
- A business which sells merchandise rather than services will use the term Sales.
- Another type of revenue is Interest Earned, which means the amount received as
interest on accounts/notes receivable, bank deposits, bonds, and other securities.

EXPENSES
Expenses are the costs of the goods and services used up in the process of earning revenue.
Expenses are often called “the costs of doing business”, that is the costs of various activities
necessary to carry on a business.

When to record revenue: The Realization Principle

When is revenue recorded in the accounting records?
For example, assume that on May 24, a real estate company signs a contract to represent a
client in selling the client’s personal residence. The contract entitles the real estate company to
a commission of 5% of the selling price, due 30 days after the date of sale. On June 10, the real
estate company sells the house at a price of P12,000,000 thereby earning a P600,000
commission, to be received on July 10. When should the company record this P600,000
commission revenue – in May, June, or July?
The company should record this revenue on JUNE 10 – the day it rendered the service of selling
the client’s house.

June 10 Account receivable 600,000.00

Commission revenue 600,000.00
To record (5%) commission revenue on selling X's residence.

July 10 Cash 600,000.00

Account receivable 600,000.00
To record the collection of 5% commission on selling X's residence.

The realization principle states that a business should record revenue at the time services are
rendered to customers or goods sold are delivered to customers.
In short, revenue is recorded when it is earned, without regard as to when the cash is received.
When to record expenses: The Matching Principle
Expenses are incurred for the purpose of producing revenue.
In measuring net income for a period, revenue should be offset by all the expenses incurred in
producing that revenue. This concept of offsetting expenses against revenue on a basis of
“cause and effect” is called the matching principle.

To illustrate the matching principle, assume that the salaries earned by sales personnel waiting
on customers during July are not paid until early August. In which month should these salaries
be regarded as an expense?

The answer is JULY, because this is the month in which the sales personnel’s services helped to
produce revenue.

The Accrual Basis of Accounting

Accrual accounting is a system of accounting based on the accrual principle, under which
revenue is recognized (recorded) when earned regardless of when collected; and, expenses are
recognized (recorded) when incurred regardless of when paid.

Accrual basis accounting typically provides a more accurate measure of a company’s

profitability as it takes into account all revenues and expenses irrespective of cash collections
and expenditures.

The result of accrual accounting is an income statement that better measures the profitability
of a company during a specific time period.

An alternative to the accrual basis is the cash basis accounting.

Under cash basis accounting, revenue is recognized when cash is collected from the customer,
rather than when the company sells goods or renders services.
Expenses are recognized when payment is made, rather than when the related goods or
services are used in business operations.

The cash basis of accounting measures the amounts of cash received and paid out during the
period, but it does not provide a good measure of the profitability of activities undertaken
during the period.

Prepaid expenses
Payments in advance such as insurance, rent, office supplies. Prepaid expenses are
assets; they become expenses only as the goods or services are used up.

Unearned revenue or Deferred revenue

Amounts collected in advance for services to be rendered to customers in the future.
When a company collects money in advance from its customers, it has an obligation to render
services in the future. Therefore the balance of an unearned revenue account is considered to
be a liability.

Single-step SCI
All revenues are listed down in one section while all expenses are listed in another. Net
income is computed as Total Revenue minus Total Expenses. (Haddock, Price & Farina 2012)
Multi-step SCI
There are several steps needed in order to arive at the company’s net income. It is more
commonly used by merchandising companies. (Haddock, Price & Farina 2012)

The Single-Step Format of SCI

ABM ENTERPRISES
Statement of Comprehensive Income
For the month ended August 31, 2017

Revenue:
Service revenue P 100,000.00

Expenses:
Salaries expense P 40,000.00
Rent expense 20,000.00
Depreciation expense - building 10,000.00
Utilities expense 5,000.00
Miscellaneous expense 1,000.00 76,000.00

Net Income (Net Loss) P 24,000.00

The Multi-Step Format of SCI
XYZ ENTERPRISES
Statement of Comprehensive Income
For the year ended December 31, 2017

Sales P 500,000.00
Less: Sales returns 30,000.00
Sales discounts 10,000.00
Net Sales P 460,000.00
Less: Cost of Goods Sold:
Merchandise inventory, beginning P 250,000.00
Add: Net purchases
Purchases P 100,000.00
Less: Purchase returns 20,000.00
Purchase discounts 10,000.00 70,000.00
Freight-in 15,000.00
Cost of Goods Available for Sale 335,000.00
Less: Merchandise inventory, ending 50,000.00 285,000.00
Gross Profit P 175,000.00
Less: Operating expenses:
Selling expenses:
Salaries expense P 20,000.00
Rent expense 15,000.00
Depreciation expense 10,000.00
Utilities expense 5,000.00 50,000.00
General and Administrative expenses:
Salaries expense P 10,000.00
Rent expense 8,000.00
Depreciation expense 7,000.00
Utilities expense 6,000.00 31,000.00 81,000.00
NET INCOME P 94,000.00

Sales (“Benta”)

This is the total amount of revenue that the company was able to generate from selling
products .

Contra Revenue accounts

Sales returns – this account is debited in order to record returns of customers or allowances
for such returns.

Sales discounts – this is where discounts given to customers who pay early are recorded.

Net Sales - Sales less Sales returns and Sales discounts

Cost of Goods Sold (“Puhunan”)

This account represents the actual cost of merchandise that the company was able to sell
during the year.

Beginning inventory – this is the amount of inventory at the beginning of the accounting
period. This is also the amount of ending inventory from the previous period.

Purchases – amount of goods bought during the current accounting period.

Contra Purchases account

Purchase discount – account used to record early payment s by the company to the suppliers
of merchandise.

Purchase returns – account used to record merchandise returned by the company to their
suppliers.

Freight-in – this account is used to record transportation costs of merchandise purchased by

the company.

Ending inventory – this is the amount of inventory presented in the Statement of Financial
Position. Total cost of inventory unsold at the end of the accounting period

Selling expenses – these expenses are those that are directly related to the main purpose of a
merchandising business: the sale and delivery of merchandise.

General and Administrative expenses – these expenses are not directly related to the
merchandising function of the company but are necessary for the business to operate
effectively.

ACTIVITY:

1) ABM Company generated revenues amounting to P100,000. Expenses for the year
totalled P76,000. How much is the company’s net income for the year?

2) MBA’s salaries to sales agents amounted to P10,000. Salaries of accountants amounted

to P20,000. No other expenses were incurred. How much is the company’s general and
administrative expense?

3) X’s beginning inventory amounted to P250,000. Net purchases amounted to P70,000.

Freight In totalled P15,000. Compute for the company’s cost of goods available for sale.

4) Y’s sales amounted to P500,000. Sales returns and sales discounts amounted to P30,000
and P10,000 respectively. Purchases of the company totaled P100,000 while purchase
returns and purchase discounts amounted to P20,000 and P10,000 respectively. How
much is the company’s net sales? Net purchases?

5) Company’s cost of goods sold amounted to P285,000. Net cost of purchases totalled
P85,000. Beginning inventory amounted to P250,000. Sales amounted to P500,000.
Compute for the company’s Ending Inventory.
6) Gross profit of Z Company amounted to P175,000. Beginning inventory totaled
P250,000. Ending inventory amounted to P50,000 while net cost of purchases totaled
P85,000. Compute for Z’s net sales.

7) During August, a sari-sari store had the following transactions involving revenue and
expenses. Did the store earn a net income or incur a net loss for the period? What
was the amount?
Paid P1,200 for rent
Provided services for P2,750 in cash
Paid P250 for telephone service
Provided services for P1,900 on credit
Paid salaries of P1,675 to employees
Paid P350 for office cleaning service