Tag Archives: Chapter 3

Elements of Income Statement

Elements of Income Statement
Revenues and expenses are the elements of income statement.

1. Revenue represents an increase in resources from the operations of an entity
2. Increase in resources may be (A), (B) or (C)
(A) Increase in assets
(B) Decrease in liabilities
(C) Both (A) and (B)

Recognition of revenue
1. Recognition means “recording” in accounting
2. Revenue is reported when it is recognized
3. Revenue is recognized when it is earned and realized (or realizable)
4. Realized means the collection of cash
5. Earned means the delivery of products or services

Revenue Recognition Principle
U.S. GAAP Codification Topic 605: Revenue
Revenues are recognized when (a) realized or realizable and (b) earned.
Revenues are
–> not recognized until realized or realizable.
–> not recognized until earned.

Revenues are realized
–> when products are exchanged for cash or claims to cash.

Revenues are realizable
–> when related assets received are readily convertible to cash or claims to cash.

Matching Principle
1. Expenses are recognized in the same period when related revenues are recognized.
2. This principle is called as “Matching Principle.”
3. Matching expenses with related revenues.

Normal balances of revenue accounts
1. Revenue accounts have normal balances on the credit side
2. Increases in revenue accounts are recorded on the credit side
3. Decrease in revenue accounts are recorded on the debit side

Normal balances of expense accounts
1. Expense accounts have normal balances on the debit side
2. Increases in expense accounts are recorded on the debit side
3. Decrease in expense accounts are recorded on the creidt side


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Operating Expenses

Operating Expenses
Rent expense
Salaries expense
Supplies expense
Insurance expense
Depreciation expense
Advertising expense
Travel expense
Communication expense
Utilities expense

Operating expenses include expense accounts that are necessary to earn operating revenues.

  • Cost of sales (or cost of goods sold)
  • Selling, General and Administrative Expenses (SG&A Expenses)
Selling, General and Administrative Expenses include the following accounts.

  • Salaries expense
  • Sales salaries expense (Salaries expense for sales personnel)
  • Insurance expense
  • Property tax expense
  • Rent expense
  • Utilities expense


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Nonoperating Income and Expenses

Nonoperating income and expenses

1. Nonoperating expenses and losses include expense and loss accounts that are due to the transactions other than the primary operations of the company.

  • Interest expense
  • Loss on sale of securities
  • Loss on sale of buildings
  • Loss on sale of machinery
  • Loss on sale of equipment
2. Interest expense account may be classified as operating expenses for banks and other financial corporations, whose primary operations are lending money to earn interest income.
3. Losses from discontinued operations are due to the disposal of business segment.

  • Loss from operations of discontinued business segment
  • Loss on disposal of business segment
4. Extraordinary losses include losses that unusual and infrequent.

  • Loss on early extinguishment of debt
  • Loss from fire
  • Loss from flood
  • Loss from earthquake


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