Section 5.

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Review of Income Statement
IFRS Principles: Matching and Revenue
Chart of Accounts

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Minds ON
⚫ What is an INCOME STATEMENT?

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What is an Income Statement?
⚫An Income statement is a financial statement
that shows the business position after a
certain period of time known as the “Fiscal”
period.

⚫It lists all the revenues and expenses of a

business

⚫It also shows the net income or net loss

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 WHAT ARE REVENUES?
Revenues happen when a business makes
a sale
like selling a product or doing a service

⚫ Note: Revenues are the increases in owner’s

equity when a business makes a sale
What are Revenues?
⚫ Revenues may result from selling products, doing
a services, renting property or lending money
(business gains interest)
⚫ Revenues usually result in an increase in an Asset
(like cash, A/R etc.)
⚫ Some businesses have more than 1 revenue
account
⚫ Revenue is also known as Sales, Fees Earned,
Interest Earned, Commissions Earned, etc.
WHAT ARE EXPENSES?
⚫Expenses are costs associated with producing revenue
⚫It results in a decrease in owners' equity that result

from operating the business

⚫The purpose of an expense is to produce revenue or to

support revenue making activities

Examples: utility expense, phone expense, rent
⚫

expense, internet expense, wages expense, interest

expense etc.
Businesses have multiple expense accounts, each one
⚫

representing a specific type of decrease in equity

 Fixed costs
EXPENSES
Variable
costs
Debt
Repayment
FIXED EXPENSES
⚫ Fixed expenses are expenses that are the same
every month.

⚫For example, Rent Expense, Insurance Expense,

Cellphone Expense, Amazon Membership expense
etc.

⚫This should not change drastically from month to

month. These expenses will be easy to estimate
based on your historical data
VARIABLE EXPENSES
⚫These expenses will be more difficult to estimate
and will be based on your assumptions for
revenue. They can possibly change every month.

⚫For example, Gas expenses, Electricity Expense

etc. Emergency Expenses etc.

⚫You can expect that as revenue increases so will

your variable expenses or vice versa.
⚫“Because it takes money to make money”
DEBT REPAYMENT
•How much do you need to pay every month
on any debt that the business has (for
example a loan).
•These should be easy to estimate because
they are likely based on a contract.
•They will not change much from month to
month unless you take on added debt.
What is a Fiscal Period? - Review
⚫Fiscal period is also known as an accounting
period
⚫All fiscal periods for the business will be the
same length
⚫Different businesses have different fiscal
periods
⚫ For example, business could have a period of
1 month, 6 months, 1 year etc. where
earnings are measured

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Who Uses Income Statements?
⚫ Owners and Managers: Income statement tells
them if business is making a profit, helps them to
make decisions about the business, can use data
from this year to compare to last year etc.

⚫ Bankers: Bankers use info from income

statement to see if a business can pay back a loan

⚫ Income Tax Authorities (Revenue Canada): Every

business is required by law to prepare an income
statement
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Who Uses Income Statements?
⚫ Investors: When a business needs extra funds,
banks are not the only option.

⚫ When investors become shareholders of a

company, they become part owners.

⚫ When investors become bondholders, they

become creditors because they are actually
lending the company money

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IFRS Rule: The Time Period Concept
⚫The time period concept states that
accounting should be taking place over
specific time periods of equal lengths known
as fiscal periods

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IFRS Rule: The Matching Principle
⚫The matching principles
states that each expense
related to revenue must be
recorded in the same period
as the revenue it helped to
earn

⚫“it takes money to make

money so you need to record
it during the same time”
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Income Statement Steps
1. First write the heading at the top of the financial statement.
2. Write the name of the business, income statement and the date. Usually it is
“Month Ended” or “Year Ended” and then the date given in the question.
3. Then write down the Revenue accounts in alphabetical order. If there is more than
one revenue account, add them all up and put the total revenues number in the
second column. Make sure you put the revenue accounts in alphabetical order.
4. Then write the expenses. Make sure you put the expenses in alphabetical order.
5. Then put the total expenses in the second column.
6. Then subtract the total revenues from the total expenses.
7. If you get a positive number then you get a Net Income.
8. If you get a negative number then you get a Net Loss.
9. Put the final net income or net loss in the second column.
10. Make sure you double underline the final total.

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 Zahara’s Flower Shop
Income Statement
Year Ended December 31st 2022
Revenue
Commissions Earned $23 000
Sales 660
Total Revenues $23 660

Expenses
Advertising Expense $ 1 321
Delivery Expense 615
Flowers Expense 3 300
Rent Expense 385
Wages Expense 9 830
Total Expenses 15 451

Net Income $8 209

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Net Income or Net Loss
Formula:
Net income (net loss) = Revenue - Expenses

⚫Net income = when revenue is bigger than

expenses

⚫Net Loss = when expenses are bigger than

revenue

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Chart of Accounts
⚫ To help organize the expanded ledger, it is
customary to create a numbering system
used for all of its accounts
⚫ These numbers are used for identification
and reference
Assets 100s

Liabilities 200s
Equity:

Capital 300s
Drawings 300s
Revenues 400s
Expenses 500s
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Chart of Accounts
⚫ Lets look at page 139 Figure 5.5

⚫ Remember: Chart of accounts is a list of the

ledger accounts and their numbers arranged
in ledger order

⚫ The order is usually: Assets, Liabilities,

Capital, Drawings, Revenues and Expenses

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Section 5.1 Exercises #2,3 on page 141
Things to do

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