Understanding the Concept of Income Statement, Revenue and Income

The information on how a business becomes successful is measured through its income statement. This part of the financial statement shows the increase or decrease of owner's equity during a given period. It also indicates the specific factors responsible for the change.

This is also called Profit And Loss Statement because it reflects the amount of profit or earnings or amount of loss. This accounting document is important because it forms the basis of many business decisions. Income statement is indicative of how well a business has performed in any particular period. Some businesses prepare the income statement at the end of the accounting period. But nowadays, many businesses prepare this more frequently, monthly or quarterly. Those establishments that balance their books daily will also be able to generate the income statement as soon as the book of accounts is closed for the day.

This statement includes two things - the revenue and the expenses. Oftentimes, the term revenue is confused with income. But they are entirely two different things and many laymen do not really understand the difference. Revenue is the firm's income prior to deduction of expenses while income is the residual amount after deducting expenses from revenue.

Revenue -

The revenue represents the items that have made money or will make money for the company. This is the receipts. And if you are on selling merchandise, the revenue will represent the total amount of sales.

Expenses -

Expenses represent the items that have cost or would cost the company money. In business, this is the devil - one that spies on the money, one that draws money out of the business. But every business has to deal with this spy in order to operate. Without expenses, the business has not operated.

Some common items of expenses are rent, light or power, water, salary and many other items that caused the company an outlay of money. Cost of Goods Sold is also an item deductible from the revenue. The cost of goods sold, also called cost of sales, is the money utilized to purchase the products that you sell. This can be finished products or raw materials which are to be converted into finished products by way of manufacturing.

If total revenues are more than the total expenses for any given period of time, then the difference between these two is called the net income or net profit. If it is the other way round where expenses exceed revenues, then company has a net loss. The statement of revenues and expenses for any particular given time is called the income statement.

Although the income statement is not the only accounting document in a financial statement, many owners regard this as the most important. This is indicative of the actual performance of the business, the basis of management decision making...

About the Author:
http://www.accountatax.ca/index.html is Based in Dollard Des Ormeaux Quebec, the heart of Montreal's West Island, Accountatax offers it's accounting, payroll, bookkeeping and business incorporation services to clients in Beaconsfield, Kirkland, Dorval, Dollard Des Ormeaux.

No. of Times this article has been viewed : 427
Date Published : Jan 27 2011

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