Income Statement

Learning Outcomes

  • Prepare an income statement

The first statement to prepare is the Income Statement.

Start with your adjusted trial balance and make sure that your trial balance actually is in balance!

NeatNiks
Adjusted Trial Balance
For the month ended October 31, 20XX
Reference No. Accounts Debits Credits
110 Checking 3,500.00
120 Accounts Receivable 5,650.00
125 Supplies 1,000.00
130 Prepaid Rent 10,000.00
210 Account Payable 1,600.00
220 Contractor Payable 1,200.00
310 Nick Frank, Capital Contributions 20,000.00
330 Nick Frank, Withdrawals 4,000.00
410 Service Revenue 8,750.00
510 Insurance Revenue 1,500.00
520 Rent Expense 2,000.00
530 Supplies Expense 1,600.00
540 Contractor Expense 2,300.00
Single line 31,550.00
Double line		 Single line 31,550.00
Double line

The income statement, sometimes called a statement of earning, or a profit and loss (P&L) shows the results of operations by reporting net income. Net income is revenues less expenses (see the highlighted accounts on the adjusted trial balance above).

When we compile these reports, we don’t use debits and credits. Those are only used when we are recording transactions. For these reports, we just use regular numbers that ordinary people can easily grasp. Notice that the expenses are all listed and there is a single underline showing we are subtotaling them, with that subtotal listed directly underneath the revenue number. The bottom line, Net Income, is clearly shown as the combination of the two numbers above it. The external user knows that net income is revenue minus expenses, so we don’t have to reiterate that on the statement.

NeatNiks
Income Statement
For the month ended October 31, 20XX
Description Amount Total
Subcategory, Revenues:
Service Revenue $8,750
Subcategory, Expenses:
Insurance 1,500
Rent 2,000
Supplies 1,600
Contractors 2,300
      Total Expenses Single Line 7,400
Net Income Single Line $1,350 Double line

Now, how much did NeatNiks earn during the month of October?

Nick Frank’s equity increased by this amount. If you think of a business as a machine that generates new wealth for the owner, this is the output. Nick has increased his ownership in the business by increasing the assets (wealth) of the business by $1,350. This isn’t the increase in cash, it’s the overall increase in all assets, less any increase in debt.

This concept will become clearer as you look at the next three statements, but first let’s just test our understanding of the Income Statement.

Practice Question