Lesson 2 Statement of Comprehensive Income (SCI)

A statement of comprehensive income is a structured financial statement that shows the financial
performance of a business entity for a given period. It summarizes all the income and expenses in an
operating cycle. Thus, the for the period ended is used in the heading to indicate its cut-off date. The SCI
contains the two remaining accounting elements – income and expenses. The difference between the two
can either be profit or loss.

Income refers to a transaction that increases assets and/or decreases liabilities leading to increase in
equity resulting from the operations of the business and not from the owner’s contribution. There are two
kinds of income – revenue and gains.
➢ Revenues are income generated from the normal course of business or from the primary
operations of the business. It varies depending on the type of business e.g. sales for merchandising
business, service income/revenue for service business, and/or both for hybrid business.
➢ Gains are income derive from other activities of the business such as interest income, gains from
disposition of an asset, dividend shares, commissions, referrals and etc.

Expenses on the hand are the transactions that decreases the assets and/or increase liabilities leading to
decrease in equity resulting from the operations of the business and not because of distributions to owners.
Just like the income, there are also two kinds of expenses – expenses and losses.
➢ Expenses area related to the primary operations of the business. It includes cost of sales/service
and operating expenses.
➢ Losses are expenses from other activities of the business other than the aforementioned.
Examples are interest from loans and loss from disposition of an asset.

Note that accrual is one of the fundamental concepts of accounting that dictates when an item must be
reported on the SCI. Accrual states that revenue must be recognized on the accounting period that it was
earned regardless when it was collected. Same goes with the expenses, expenses must be reported during
the accounting period they were incurred irrespective of the payment date. Now the question is, when is
income earned and expenses incurred?
Generally, revenue is earned upon delivery of goods and services, not when payment is received from
the customer. We can say that there is already a revenue when goods are already handed over to the customer
or when services are already rendered. Following the same concept, expense is recognized when an item is
used to generate revenue. Regardless of the payment date, expense is recorded when an account loses its
economic value.

✓ Fast Check!
Let’s see what has been learned by answering the following questions:
1. Why does SCI use for the period ended in its heading?

2. What is the accrual concept of accounting?

3. When is revenue reported on the SCI?

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 Elements of the Statement of Comprehensive Income
From the earlier part of this lesson, we learned that SCI has two components – income and expenses. In
this part of our lesson we will be learning more details each components and the various accounts names
under revenues.

Revenue
Service Income account is generally used to describe any revenue derived for rendering services. A
more specific account may be used to identify the type of service rendered such as Rental Income,
Professional Fee and Tuition Fee Revenue.

Sales is the account used to record revenue obtained from selling of goods. Just like the service income,
we can also use more specific accounts to identify the type of sales that occurred especially if the business
is selling multiple items like a general merchandise store. It can use Office Supplies Sales, Home Décor
Sales and many more.

In preparing the SCI, Net Sales is identified and is report on the face of the SCI. Net sales refers to the
sales after the Sales Discount and Sales Return and Allowance. (Net Sale = Gross Sales – Sales Discount –
Sales Return and Allowances)

➢ Sales Discount is the reduction in the price of a product or service. Three are two common
discounts granted to customers – trade discount and cash discounts.

❖ Trade discount is a percentage reduction from the price that is being granted to retailers or
wholesalers who usually buys in large quantities and/or who regularly patronizes the
business (suki).

❖ Cash discounts are given to the customers who purchased on account to encourage them to
pay immediately. A credit term is identified and appears on the invoice. The usual credit
term is 2/10, n/30 which means the account is payable within 30 days from the point of sale
(n/30) and a 2% discount is given when paid within 10 days from the point of sale (2/10).

➢ Sales Return and Allowances are instances when a customer returned a merchandise that is
damaged or defective. When a customer returns an item to the company it is a sales return.
A sales allowance occurs when the company reduces the price paid by a customer because the
customer received defective merchandise.

Both sales discount and sales return and allowances are contra-revenue accounts that have a debit normal
debit balances and reduces the sales. Let’s have the following scenario to illustrate the computation of net
sales.

Illustration: Sales Revenue

On July 14, 2019 Giean Montemayor, owner of a novelty store, sold 12 boxes of marker to
Reann Saddi for ₱3,000 on account with a term 2/10, n/30. A box marker cost ₱250 and

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 contains 10 markers each. On July 20 Reann returned four defective markers and paid the
amount to Giean.

Determine the amount of sales return, sales discount, and net sales for the above transaction.

Answer
Sales ₱250 x 12 box ₱3,000.00
Sales Return and (₱250/10 marker) x 4 returned (100.00)
Allowances marker
Amount Due to Giean 2,900.00
Sales Discount 2,900 x 2% (58.00)
Net Sales ₱2,842.00

Take note that sales discount is taken from the sales after the sales returns. This is because
the returned markers are no longer part of the sales and will be excluded from the computation
of the discount. Using the gross sales in computing for the discount will result to overstating
stating the sales discount and understating the net sales.

✓ Fast Check!
Let’s see what has been learned by answering the following questions:
1. What is the account name used to record revenues in a service business? ___________
2. What are the two contra sales accounts? ___________
3. What is the normal account balance of a contra-sales account? ___________
4. What is meant by 2/10, n/30? ___________

Expenses
Cost of Goods Sold (COGS)/Cost of Sales is an account specifically used by a merchandising type of
business or any business ventured in selling products. The COGS summarizes the cost of the merchandise
sold in a period of time. It is composed of the purchase price of inventory, brokerage, and shipment cost to
bring the goods to the premises of the company – Freight-In.
The COGS is part of inventory accounting. It is recorded in two ways – perpetual and periodic inventory
system. Perpetual inventory system increases the inventory account when there is an acquisition of goods
for sale and decreases when the goods are sold. The COGS account is updated when there’s a sale of goods.

On the other hand, periodic inventory system updates the inventory account only at the end of the month
or end of the year. Since this method post updates the inventory account periodically, it collects the cost of
merchandise in an account called Purchases. Just like the Sales account, Purchases has it contra-purchase
accounts as well. Discounts given by the suppliers are recorded in Purchase Discounts account. Return of
defective or damaged goods are reported under the Purchase Return and Allowances. The two contra-
purchase accounts have credit normal balances. The use of periodic inventory system calls for the
computation of Net Purchases using the formula Purchases + Freight-In – Purchase Return and Allowances
– Purchase Discounts. This is similar to the accounting treatment for sales.

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 In the periodic inventory system, COGS is computed using the following formula:

Beginning inventory XXX

Add: Net Purchases (Purchases + Freight-In – Purchase Return and Allowances – XXX
Purchase Discounts) XXX
Total Goods Available for Sale (TGAS) (XXX)
Less: Ending Inventory XXX
Cost of Goods Sold (COGS)

A physical count of the merchandise owned by the company determines the beginning and ending
inventory. The ending inventory of the prior-period serves as the beginning inventory of the current period.
The periodic adjustment updates the inventory account to reconcile the balance based on year-end physical
count.

To illustrate the aforementioned concepts, let’s try this example

Illustration: Cost of Goods Sold

Giean Montemayor purchased eight boxes of legal size bond paper from the NBS on April
30, 2020. The purchase invoices revealed that each box cost ₱1,600 each and has five reams
of bond paper each. The items are in a term of 3/10, n30. A delivery fee of ₱250 was paid
upon receipt of the items. On May 15, one box was returned due to incorrect paper size and
paid the amounts due to NBS. Compute for the net purchase.

Answer
Purchases ₱1,600 x 8 box ₱12,800.00
Freight-in 250.00
Purchase Return and 1 box x ₱1,600 (1,600.00)
Allowances
Amount Due to NBS 11,450.00
*Purchase Discount -
Net Purchases ₱11,450.00

* Why do you think that there is no amount for the purchase discount? This is due to the
fact that Giean settled the amount account to NBS on May 15 which is already 15 days from
the point of sale and is already beyond the discount period.

Giean’s prior-period inventory count revealed that there are still six reams of bond paper
valued at ₱1,920 in the inventory account and there are three reams in the year-end physical
count. Compute for the COGS.
Answer
Beginning Inventory ₱1,920.00
Purchases ₱1,600 x 8 box ₱12,800.00
Freight-in 250.00
Purchase Return and Allowances 1 box x ₱1,600 (1,600.00)
Purchase Discount -
Net Purchases 11,450.00
Total Goods Available for Sale 13,370.00
Ending Inventory (based on the (₱1,600/5reams) x 3 960.00
physical count) reams
Cost of Goods Sold ₱14,330.00

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 The accurate computation of the Net Purchase is a requisite to arrive at the correct amount of
the COGS.

Operating Expenses are those expenses that are directly attributable to the operation of the business.
These includes salaries of employees, supplies, utilities (electricity, telephone, and water bill), delivery
expense (freight-out), rent, insurance, repairs and maintenance, bad debts, depreciation, and amortization.

Other Income and Other Expenses

After the operation section of the SCI, the gains and other income as well as losses and other expenses
are reported on the face of the SCI. Interest income from investments of excess cash, interest expense for
borrowings, and gain or loss from the sale of asset (proceeds from selling price less the book value of the
asset the date of disposition) are the line items included in this section.

✓ Fast Check!
Let’s see what has been learned by answering the following questions:
1. What are the components of net purchase? ___________
2. What is freight-in? ___________
3. Differentiate periodic and perpetual method of inventory system. ______________________
4. What are the contra-purchase accounts? ___________

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