Revenue and Expense Recognition, Income Statement Preparation,

Procedure and Presentation of Income Statement

CLARA MAULINA SIBARANI, JANNY KARINA GINTING, MONIKA EM DAMANIK

I. Revenue and Expense Recognition

Income statement is an overview of the business development through financial
information obtained from the level of achievement of profits and losses of an entity. The main
elements of the income statement are income and expenses. The accounting treatment of income
and expenses is one of the benchmarks for the success of a business in achieving its production
results. The better the treatment of income and expense accounting, the better the financial
information obtained by an entity to be used further in a decision making to support the
development and progress of an entity. This is because, good accounting treatment of income
and expenses will have reliability and fairness in its reporting.

Revenue and expenses are important issues that must be understood by companies to
produce reliable financial statements and in accordance with generally accepted accounting
principles, because many companies ignore and consider unimportant the issue of accounting
treatment of income and expenses. Errors in the accounting treatment of income and expenses
will have a major effect on business profit and loss which affects decision making in the
management of a business.

The choice of methods and techniques in accounting can affect the recognition of income
and expenses. In financial reporting, the center of attention in the income statement is the total
income, expenses and profit, this greatly affects the accuracy of revenue recognition. Thus, the
financial statements must be properly presented and the company's financial position.

A. Revenue

Definition of Revenue

Santoso in Lumingkewas (2013) states that income is an inflow or addition of assets or

the settlement of an obligation or a combination of both originating from the delivery or
production of goods, the provision of services or other activities that constitute a continuous
major/central operation of a company.
Sources and Types of Income

Basically, the income arises from the sale of goods or the delivery of services to other
parties within a certain accounting period. Revenue can arise from sales, production processes,
rendering of services including transportation and storage processes (earning processes). In a
trading company, revenue arises from the sale of merchandise. In manufacturing companies,
revenue is derived from the sale of finished products. As for service companies, revenue is
obtained from the delivery of services to other parties. The types of income from one company
activity are as follows:

a. Operating income, according to Dyckman, Dukes and Davis (2002: 239) basically operating
income arises from various ways,

b. Income derived from business activities carried out by the company itself without the delivery
of services that have been completed.

c. Income derived from business activities in the presence of an agreed relationship, for example
consignment sales.

d. Income from business activities carried out in collaboration with investors.

Revenue Recognition

Harnanto (2003:389) states regarding revenue recognition, namely, "To be recognized,

income must be realized or realizable and earned".

According to the Financial Accounting Standard Board (FASB) provides two criteria for
revenue recognition as adapted by Suwardjono (2009) are as follows:

a. Revenue is only recognized when the amount of revenue in rupiah has been realized or it
is quite certain that it will be realized soon. Revenue is said to have occurred in the
exchange of products or services resulting from the company's activities with cash or
claims to receive cash. Revenue can be said to be quite certain and will be realized
immediately if the exchanged goods received can be easily converted into a certain
amount of cash or cash equivalents. To be able to meet the requirements for easy
conversion of exchangeable goods (assets) which are definitely not influenced by the
 shape and size of the goods and are easily traded and traded without requiring significant
costs.
b. Revenue can be recognized when the revenue has been collected/formed. To earn
income, the company must carry out activities to produce goods or services which are the
main source of income. Revenue can be said to have been collected when the income
generating activity has been running and substantially completed so that a business unit
has the right to control the benefits contained in the income.

Revenue is recognized when it is probable that the economic benefits associated with the
transaction will be obtained by the company. However, when an uncertainty arises about the
collectibility of an amount already included in revenue, the uncollectible amount, or the amount
for which recovery is no longer probable, is recognized as an expense rather than an adjustment
of the amount of revenue originally recognized. Usually companies need to have an effective
internal budgeting and financial reporting system. The company reviews and, if necessary,
revises revenue estimates as the service is rendered. The need for such revision need not indicate
that the outcome of the transaction cannot be estimated reasonably.

B. Expenses

Definition of Expense

Reeve (2013: 19) expenses are defined as money used in the process of earning income.
According to Mulyadi (2012: 7) costs are cash or cash equivalent values that are sacrificed or
consumed to obtain goods or services that are expected to provide current or future benefits.

Measurement of Expenses

Measurement of expenses can be based on historical cost, replacement cost. In general,

the measurement of expenses using the historical cost method is more often used, namely the
measurement of expenses based on the amount of rupiah spent when goods and services are
obtained.
Expense Disclosure

Expense Disclosure consists of:

a. In the balance sheet, the amount of liability that arises as a result of the difference between the
amount of funding that has been carried out by the employer since the establishment of the
program and the amount recognized as an expense during the same period.

b. In the income statement, the amount is recognized as an expense during the period concerned.

Expense Recognition

Hendriksen (1988: 182) states that the burden occurs when goods or services are
consumed or used in the process of earning income. When reporting expenses, it is done by
recording activities in estimates or including them in financial statements. Expenses are
recognized in the income statement where the income statement is based on a direct relationship
between the costs incurred and certain items of income earned.

In the Statement of Financial Accounting Standards (2007) that expenses are immediately
recognized in the income statement if they meet the following criteria:

1. Expenses are recognized in the income statement on the basis of a direct relationship between
costs incurred and items of income earned.

2. Expenses are recognized in the income statement on the basis of a rational and systematic
allocation procedure. This means if future economic benefits are expected to arise over several
accounting periods and the relationship to income is only broadly acceptable or indirect.

3. Expenses are recognized in the income statement if the expenditure does not generate future
economic benefits or if it does not meet the requirements then it is recognized in the balance
sheet as an asset.

4. Expenses are recognized in the income statement on the recognition of assets

Expenses are also a factor that affects the fairness of financial statements. Where an
expense is also recognized in the income statement in relation to the economic benefits
associated with a decrease in an asset or an increase in a liability that has been incurred and can
be measured reliably. Then the company's expenses must be recorded properly because it
determines the company's profit, the expense includes both losses and expenses arising from the
company's activities to earn income. The accuracy of recording expenses depends on the
accuracy of the classification of expenses applied by the company. The preparation of financial
statements is inseparable from the selection of accounting methods, techniques and policies.

II. Income Statement Preparation

An income statement is a financial report detailing a company’s income and expenses over a
reporting period. It can also be referred to as a profit and loss (P&L) statement and is typically
prepared quarterly or annually.

Income statements depict a company’s financial performance over a reporting period.

Because the income statement details revenues and expenses, it provides a glimpse into which
business activities brought in revenue and which cost the organization money information
investors can use to understand its health and executives can use to find areas for improvement.

An income statement typically includes the following information:

 Revenue: How much money a business took in during a reporting period

 Expenses: How much money a business spent during a reporting period
 Costs of goods sold (COGS): The total costs associated with component parts of
whatever product or service a company makes and sells
 Gross profit: Revenue minus costs of goods sold
 Operating income: Gross profit minus operating expenses
 Income before taxes: Operating income minus non-operating expenses
 Net income: Income before taxes
 Earnings per share (EPS): Net income divided by the total number of outstanding
shares
 Depreciation: Value lost by assets, such as inventory, equipment, and property, over
time
 EBITDA: Earnings before interest, depreciation, taxes, and amortization
Step to prepare income statement :

1. Choose Your Reporting Period

Your reporting period is the specific timeframe the income statement covers. Choosing the
correct one is critical.

Monthly, quarterly, and annual reporting periods are all common. Which reporting period is
right for you depends on your goals. A monthly report, for example, details a shorter period,
making it easier to apply tactical adjustments that affect the next month’s business activities.
A quarterly or annual report, on the other hand, provides analysis from a higher level, which
can help identify trends over the long term.

2. Calculate Total Revenue

Once you know the reporting period, calculate the total revenue your business generated
during it. If you prepare the income statement for your entire organization, this should include
revenue from all lines of business. If you prepare the income statement for a particular
business line or segment, you should limit revenue to products or services that fall under that
umbrella.

3. Calculate Cost of Goods Sold (COGS)

Next, calculate the total cost of goods sold for any product or service that generated
revenue for your business during the reporting period. This encompasses direct and indirect
costs of producing and selling products or services, including:

 Direct labor expenses

 Material expenses
 Parts or component expenses
 Distribution costs
 Any expense directly tied to the production of your product or service
 4. Calculate Gross Profit

The next step is to determine gross profit for the reporting period. To calculate this,
simply subtract the cost of goods sold from revenue.

5. Calculate Operating Expenses

Once you know gross profit, calculate operating expenses (OPEX). Operating expenses
are indirect costs associated with doing business. These differ from cost of goods sold because
they’re not directly associated with the process of producing or distributing products or
services. Examples of expenses that fall under the OPEX category include:

 Rent
 Utilities
 Overhead
 Office supplies
 Legal fees
6. Calculate Income

To calculate total income, subtract operating expenses from gross profit. This number is
essentially the pre-tax income your business generated during the reporting period. This can
also be referred to as earnings before interest and taxes (EBIT).

7. Calculate Interest and Taxes

After calculating income for the reporting period, determine interest and tax charges.
Interest refers to any charges your company must pay on the debt it owes. To calculate
interest charges, you must first understand how much money you owe and the interest rate
being charged. Accounting software often automatically calculates interest charges for the
reporting period. Next, calculate your total tax burden for the reporting period. This includes
local, state, and federal taxes, as well as any payroll taxes.

8. Calculate Net Income

The final step is to calculate net income for the reporting period. To do this, subtract
interest and then taxes from your EBIT. The number remaining reflects your business’s
 available funds, which can be used for various purposes, such as being added to a reserve,
distributed to shareholders, utilized for research and development, or to fuel business
expansion.

III. Procedure and Presentation of Income Statement

There are two different types of income statement that a company can prepare such as the
single-step income statement and the multi-step income statement.

1. Single step income statement

Net Profit= Total Revenue - Total Expenses

When preparing the single-step income statement, this statement displays the company's
expenses and revenues without breaking down into further sub-categories. To calculate the single-
step income statement's net income, you will have to subtract the company's total revenue from the
total expenses.

The single-step income statement is commonly used by small-sized businesses or those in

sole-proprietorship companies.

2. Double step income statement

The multi-step income statement is the standard format of an income statement prepared
by big corporations and all publicly listed companies.

Three equations are used to derive the net income using the multi-step income statement.
Companies that prepare their income statement using the multi-step approach will typically
breakdown their revenues and expenses into operating and non-operating business activities.

The three accounting equations that are used to arrive at the net income are stated below:

Gross Profit= Net Sales - Cost of Goods Sold

Operating income = Gross Profit - Operating Expense

 Net Income = Operating Income + Non Operating Items

3. The comparison between single step and double step

Single-Step

 Uses one equation to calculate Net Income

 Straightforward and simple

Multi-Step

 Separates operating items and non-operating items into a 3 step process

 Offers more insight into the performance of a business
 Reports the line items gross profit and operating income
 Takes more effort to prepare

4. Benefits of Multi-step Income Statements

Multi-step income statements offer many benefits. The statement shows the line items
gross profit and operating income, which are metrics commonly looked at by
management, investors, and creditors.
 It is a more detailed version of the single-step income statement and can lead to
additional insight.

With a multi-step, you can see how well the business is performing in its main
business activities and how it is performing in its other activities.

As stated in the previous section, using a multi-step income statement is beneficial

when trying to attract investors or apply for credit.
 REFERENCES

Harnanto. 2003. Akuntansi Perpajakan. BPFE. Yogyakarta

Hendriksen, Eldon S, 2005, Teori Akuntansi, Terjemahan Nugroho Widjajanto, Penerbit Erlanga,
Jakarta.

Lewingkewas, Valen A. 2013. Pengakuan Pendapatan dan Beban Atas Laporan keuangan.
Jurnal
Emba.Vol.1 No.3.199-206, http:// Portal Garuda.EJurnal/, (diakses pada 24 Desember

2018)
Mulyadi. 2012. Akuntansi Biaya. Edisi Ke 5. Cetakan Kesebelas. STIM YKKPN, Yogyakarta.

Reeve, Jusuf, Warren, Duchar. K. 2013. Pengertian Pendapatan dan Beban. Principles of
Accounting. Volume 1. Salemba Empat, Jakarta.