Success in accounting learning depends on the proper understanding of the basic accounting concepts, which form the basis for the theory and practice. One of the concepts to learn and understand is Income Statement, which will be described and explained further.

Concept

Income Statement is one of the three main financial statements, in addition including Balance Sheet and Cash Flow Statement. This financial statement indicates changes in the financial position of the business for a particular period of time, i.e. month, quarter or year. In this statement net profit, i.e. increase in owners’ equity, or net loss, i.e. decrease in owners’ equity is reflected for the given period.

Income Statement is related with the Balance Sheet in the terms of net result for the period, i.e. profit or loss for the period from this financial statement goes to the Balance Sheet as an increase or decrease in Retained Earnings (result not distributed to the shareholders as dividends).

Items Included

Considering the structure of Income Statement, it is important that this statement indicates not only net result for the period, but also constituent parts, which make this result. So this statement will include the following:

Revenue: amounts earned for the goods sold or services provided
Cost of Sales: cost of goods sold or services provided. In case only goods are being sold, this items will be called Cost of Goods Sold. Here all the cost which are directly related to the revenues earned are included
Gross Profit: difference between two mentioned items, which indicate how much business earns from the main operations
Operating Expenses: this items consists of the expenses which cannot be directly related to the cost of goods sold or services provided. Examples can be salaries of accountants, administrative office space rent and other
Operating Profit: difference between Gross Profit and Operating Expenses
Interest Expenses: these expenses are shown separately to indicate financial costs the business incurs and whether it earns sufficient profit to be able to pay interest on time
Net Profit (Loss): this is the net result for the period. If it is positive, we have a profit. If it is negative, we have a loss.
Important to notice, that Income Statement is usually prepared on the accrual basis, i.e. income and related expenses are recognized despite the fact that cash was not yet paid or received, but based on the obligation from customers to pay for goods sold or services provided and based on the obligation of the business to pay its liabilities.

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All businesses need investment. Depending on the size and nature of business, a lot of money to turn it on. But it is a great danger that this money could be lost if the business does not work.

Investment risk associated with starting a business can be overwhelming. This is especially true for one person to start a business for the first time. The process is long and requires patience and perseverance to succeed, especially in the early stages. As time passes, more details to be settled and one of these processes is the auditor of the company.

It is very important for business owners to understand basic accounting principles, not only benefits the company but also for your own peace of mind. While the owner normally receives an accountant or a bookkeeper to perform bookkeeping tasks, understanding the process of accounting is very important for owners to better understand how the business works well and has a better understanding of the finer details influence the success or failure.

There are some basic accounting principles to a business owner should consider. They constitute the generally accepted accounting principles and U.S. GAAP. Other countries have similar regulations issued by accounting standard boards. Australia. Standards Australia Accounting Standards Board IAS issues

Cost principle

One is the principle of cost. On this basis, the assets of the company are accounted for and presented on the basis of actual costs of acquiring these assets and not its market value. This principle is considered more reliable and reduces the possibility of a party to interfere with the market value of the accounts.

Principle of accrual accounting

Another principle is accrual accounting. Under this system, all business organizations to record and report all income on the time taken or completed and not when cash or products received by the company. This principle is important because it shows what is done or completed, and what you can do in the future.

Matching Principle

The third principle is the principle of correspondence. This International Accounting Standard requires that the company is responsible for revenue with the costs incurred to generate revenue. This ensures that companies have reported earnings results include all expenses, and therefore accurately reflect the activities to generate income.

Disclosure Principle

The fourth principle is the principle of publicity. Financial reports are usually provide information on past performance of the company. The revelation that the client insists that the events or future reports, and politics driving the company used the reports. This ensures that reports are transparent and the analysis can be easily reached.

Bottom Line

It is also important for employers to understand these basic principles to understand the information on the financial statements, and therefore make better decisions.