Accounting Tutorial : The Income Statement

Accounting Tutorial: The Income Statement Chapter 3

One of your tasks in the accounting department is to create income statments to be included in the business plan. An income statement is a financial report that shows the owners, managers and others how much profit a company makes. There are two kinds of accounts in our chart of accounts that go on the income statement: Revenue and Expenses. The revenue portion is composed of sales of our product or service. The expense portion of the income statement contains amounts of money that we need to spend in order to create our sales. If you remember from our first chapter on Starting the Accounting System, there are many kinds of expenses. They vary from one business to another, but there are a large number of them that are common to all companies: Rent, Salaries, Advertising, Utilities, Depreciation, Repairs, etc. Normally an income statement is generated from the general ledger, which is a series of accounts for the business. We need to project an income statement before we have even begun to start our business. Later on in the tutorial, you will see how to create an income statement based on actual business transactions that have changed general ledger amounts. There are two kinds of income statements: One for a service business and the other for a company that carries an inventory of merchandise. We will address both of these since some Virtual Enterprise companies are service oriented and others are merchandising businesses. Since we have now idea what are sales will be, it is best to see what all our expenses are first. Then we can determine what are sales must be in order to meet our expenses. If you go to http://janetbelch.com. Click on the Curriculum link. Then click on VirtuBank Standard Payment Rates for Companies, you can see some of the expenses that are required to setup an income statement for Virtual Enterprise Companies. I have put these expenses in the two income statements listed in the scroll boxes below. Remember , the one on the right is for a merchandising business and the one on the left is for a service businnes. These particular expenses are the same for both types of companies. Since some of the expenses are based on the number of students in the VE class, we will assume that there 25 students in our class. To calculate Utilities Expense proceed as follows: $3.00 rate per person for water. 3 X 25 = $75.00. For natural gas, the rate is also $3.00 per person per month. 3.00 X 25 = $75.00. The electric bill is calculated as follows. 25 X $30.00 per person per month = $750. The phone bill is $25 per person per month for a total of $625.00. High speed Internet access, according to our standard rate table is $350.00 Now lets add up all of these number since they are classified as utilities expense. The total for utilities expense is $1,875.00 If you have a company automobile, the cost is $2.50 per galon. Sixty gallons must be purchased per month for each vehicle for a total of $150.00. The examples below do not have this expense. The portion of our loan payment that is interest each month is an expense. Remember that the amount of our loan is $150,800. In the last lesson, we calculated that the interest at 12% for 10 years came out to $108,825.03 for interest. If we look at our amortization table, we see that the November payment of $2,163.54 is composed of $655.54 toward the principal and $1,508.00 for interest expense. Our rent has been calculated by Virtual Enterprise. The amount is $3,500.00 Our insurance expense is $30.00 per month per person for a total of $750.00. If our company has an automobile the cost is $250.00 per automobile. Advertising expense is directly related to the type of advertising media your marketing department has chosen: print media such as newspapers, magazines; direct mail, television; billboards; radio; etc The target market for both companies is basically the same. One segment of the market is high school and college age students planning an event such as a high school dance, senior proms. The other market segment is composed of people planning weddings. One way to reach the first segment is through advertising in the high school and college newspapers. The other and older group is best reached with traditional newspaper advertisng and cable TV. Advertsing rates differ based on media and size of the market. Let's assume your marketing department has decided to spend $2,000 per month on advertising. Each company has certain specialized expenses. One expense incurred by both compaines is alterations expense. Tuxedos, bridesmaid dresses, suits and wedding gowns need to be tailored. Our two companies send these alterations out to a tailor. Our cost is estimated to be $1,500.00 per month. Our office supplies expense is estimated to be about $150.00 per month. Normally we would not just expense out supplies, but for now we are just making estimates. Later on we will learn how to make adjustments to our supplies account. Certain repairs to office equipment, cash registers, fixtures, etc need to be on occasion, so we will plan on $50.00 per month for both companies. Sometimes there are expenses that do not fit in any of the categories that we have set up. That is what miscellaneous expense is designed for. We are planning $100.00 per month. Depreciation is a method of charging off to an expense the wear and tear on equipment and other assets. There are a number of different methods of depreciating an asset. We will use the simplest one, called straight-line. We first determine the value of the asset. Next we determine the useful life of it. We divide by the number of years and then by 12 to determine the monthly amount that can be charged to depreciation expense. To see the value of the assets we need to look back at lesson two to see what the assets are and their value. For both companies proceed as follows. Display cases cost $25,000. Assume a life expectancy of 10 years. Yearly depreciation for this asset is $2,500 per year. Monthly depreciation is $2,500/12 = 208.33. Display racks cost $20,000. Life of the asset is equal to 10 years, therefore, yearly depreciation is $2,000 and monthly depreciation is $166.67. Our $2,000 cash register has a useful value for 5 years, therfore yearly depreciation is $400 and the monthly depreciation is $33.33 per month. Our computer cost $1,500. Since computers and operating systems change regularly we will assume a 3-year life value for the asset. The monthly depreciation for the computer is $41.67. The software used to operate the computer is also and asset. Years of useful service for the software is also 3 years. Montly depreciation is $27.78 The filing cabinet cost $300. Life equal 5 years. Yearly depreciation is $60 and monthly is $5.00. Our desk cost $400 and we calculate that this one will do for the next 5 years. Montly depreciation is $6.67. Our desk chair cost $100 when purchased. It will last for 5 years. Yearly depreciation is $20 and monthly is $1.67. Now let's add up the amounts of monthly depreciation for each asset so that we can come up with the amount for depreciation expense to put on the income statement. 208.33 + 166.67 + 33.33 + 41.67 + 27.78 + 5.00 + 6.67 + 1.67 = 491.12 For the tuxedo rental company, we have another very large asset that needs to be depreciated, the tuxedos that are rented out. The value of this asset is $100,000. Since styles change and the tuxedos get worn out after repeated use, we have determined that all tudedos will need to replaced in 3 years. This calulates out to $33,333 per year or $2,777 per month. If you look below you should see the amount of total depreciation for both companies. Even though we are not finished with the income statement, let's get started on your own company's one. Use the form provided. Complete the top part of the income statement by writing your company's name, the words "Income Statement" just below and the words "for the period ending November 30" and begin listing expenses and amounts for your own business. Answer the questions below and record your answers on your worksheet. Click the right arrow key to continue with this lesson,

Bromley's Tuxedo Rentals Income Statement For the period ending Current Date REVENUE Sales Other Income Total Revenue EXPENSES Salary Expense Rent Expense 3,500.00 Repairs Expense 50.00 Alterations Expense 1,500.00 Dry Cleaning Expense Advertising Expense 2,000.00 Supplies Expense 150.00 Depreciation Expense 3,268.12 Insurance Expense 750.00 Miscellaneous Expense 100.00 Payroll Taxes Expense Legal And Accounting Utilities Expense 1,875.00 Bad Debts Expense Interest Expense 1,508.00 Delivery Expense Total Expenses Net Profit Bromley's Formal Wear Income Statement For the period ending Current Date REVENUE Sales Other Income Total Revenue COST OF MERCHANDISE SOLD EXPENSES Salary Expense Rent Expense 3,500.00 Repairs Expense 50.00 Alterations Expense 1,500.00 Advertising Expense 2,000.00 Supplies Expense 150.00 Depreciation Expense 491.12 Insurance Expense 750.00 Miscellaneous Expense 100.00 Payroll Taxes Expense Legal And Accounting Utilities Expense 1,875.00 Bad Debts Expense Interest Expense 1,508.00 Delivery Expense Total Expenses Net Profit

1. A financial report that shows how much profit a company makes?
Balance Sheet Chart of Accounts Income Statement
2. An income statement contains the following type of accounts.
Assets and Liabilities Revenue and Expenses Expenses and Liabilities

3. Rent expense for VE companies should be?
$5,000 per month $3,500 per month $6,000 per month
4. What method was used for depreciating our assets?
Straight Line Sum of the Years Digits Units of Output

	One of your tasks in the accounting department is to create income statments to be included in the business plan. An income statement is a financial report that shows the owners, managers and others how much profit a company makes. There are two kinds of accounts in our chart of accounts that go on the income statement: Revenue and Expenses. The revenue portion is composed of sales of our product or service. The expense portion of the income statement contains amounts of money that we need to spend in order to create our sales. If you remember from our first chapter on Starting the Accounting System, there are many kinds of expenses. They vary from one business to another, but there are a large number of them that are common to all companies: Rent, Salaries, Advertising, Utilities, Depreciation, Repairs, etc. Normally an income statement is generated from the general ledger, which is a series of accounts for the business. We need to project an income statement before we have even begun to start our business. Later on in the tutorial, you will see how to create an income statement based on actual business transactions that have changed general ledger amounts. There are two kinds of income statements: One for a service business and the other for a company that carries an inventory of merchandise. We will address both of these since some Virtual Enterprise companies are service oriented and others are merchandising businesses. Since we have now idea what are sales will be, it is best to see what all our expenses are first. Then we can determine what are sales must be in order to meet our expenses. If you go to http://janetbelch.com. Click on the Curriculum link. Then click on VirtuBank Standard Payment Rates for Companies, you can see some of the expenses that are required to setup an income statement for Virtual Enterprise Companies. I have put these expenses in the two income statements listed in the scroll boxes below. Remember , the one on the right is for a merchandising business and the one on the left is for a service businnes. These particular expenses are the same for both types of companies. Since some of the expenses are based on the number of students in the VE class, we will assume that there 25 students in our class. To calculate Utilities Expense proceed as follows: $3.00 rate per person for water. 3 X 25 = $75.00. For natural gas, the rate is also $3.00 per person per month. 3.00 X 25 = $75.00. The electric bill is calculated as follows. 25 X $30.00 per person per month = $750. The phone bill is $25 per person per month for a total of $625.00. High speed Internet access, according to our standard rate table is $350.00 Now lets add up all of these number since they are classified as utilities expense. The total for utilities expense is $1,875.00 If you have a company automobile, the cost is $2.50 per galon. Sixty gallons must be purchased per month for each vehicle for a total of $150.00. The examples below do not have this expense. The portion of our loan payment that is interest each month is an expense. Remember that the amount of our loan is $150,800. In the last lesson, we calculated that the interest at 12% for 10 years came out to $108,825.03 for interest. If we look at our amortization table, we see that the November payment of $2,163.54 is composed of $655.54 toward the principal and $1,508.00 for interest expense. Our rent has been calculated by Virtual Enterprise. The amount is $3,500.00 Our insurance expense is $30.00 per month per person for a total of $750.00. If our company has an automobile the cost is $250.00 per automobile. Advertising expense is directly related to the type of advertising media your marketing department has chosen: print media such as newspapers, magazines; direct mail, television; billboards; radio; etc The target market for both companies is basically the same. One segment of the market is high school and college age students planning an event such as a high school dance, senior proms. The other market segment is composed of people planning weddings. One way to reach the first segment is through advertising in the high school and college newspapers. The other and older group is best reached with traditional newspaper advertisng and cable TV. Advertsing rates differ based on media and size of the market. Let's assume your marketing department has decided to spend $2,000 per month on advertising. Each company has certain specialized expenses. One expense incurred by both compaines is alterations expense. Tuxedos, bridesmaid dresses, suits and wedding gowns need to be tailored. Our two companies send these alterations out to a tailor. Our cost is estimated to be $1,500.00 per month. Our office supplies expense is estimated to be about $150.00 per month. Normally we would not just expense out supplies, but for now we are just making estimates. Later on we will learn how to make adjustments to our supplies account. Certain repairs to office equipment, cash registers, fixtures, etc need to be on occasion, so we will plan on $50.00 per month for both companies. Sometimes there are expenses that do not fit in any of the categories that we have set up. That is what miscellaneous expense is designed for. We are planning $100.00 per month. Depreciation is a method of charging off to an expense the wear and tear on equipment and other assets. There are a number of different methods of depreciating an asset. We will use the simplest one, called straight-line. We first determine the value of the asset. Next we determine the useful life of it. We divide by the number of years and then by 12 to determine the monthly amount that can be charged to depreciation expense. To see the value of the assets we need to look back at lesson two to see what the assets are and their value. For both companies proceed as follows. Display cases cost $25,000. Assume a life expectancy of 10 years. Yearly depreciation for this asset is $2,500 per year. Monthly depreciation is $2,500/12 = 208.33. Display racks cost $20,000. Life of the asset is equal to 10 years, therefore, yearly depreciation is $2,000 and monthly depreciation is $166.67. Our $2,000 cash register has a useful value for 5 years, therfore yearly depreciation is $400 and the monthly depreciation is $33.33 per month. Our computer cost $1,500. Since computers and operating systems change regularly we will assume a 3-year life value for the asset. The monthly depreciation for the computer is $41.67. The software used to operate the computer is also and asset. Years of useful service for the software is also 3 years. Montly depreciation is $27.78 The filing cabinet cost $300. Life equal 5 years. Yearly depreciation is $60 and monthly is $5.00. Our desk cost $400 and we calculate that this one will do for the next 5 years. Montly depreciation is $6.67. Our desk chair cost $100 when purchased. It will last for 5 years. Yearly depreciation is $20 and monthly is $1.67. Now let's add up the amounts of monthly depreciation for each asset so that we can come up with the amount for depreciation expense to put on the income statement. 208.33 + 166.67 + 33.33 + 41.67 + 27.78 + 5.00 + 6.67 + 1.67 = 491.12 For the tuxedo rental company, we have another very large asset that needs to be depreciated, the tuxedos that are rented out. The value of this asset is $100,000. Since styles change and the tuxedos get worn out after repeated use, we have determined that all tudedos will need to replaced in 3 years. This calulates out to $33,333 per year or $2,777 per month. If you look below you should see the amount of total depreciation for both companies. Even though we are not finished with the income statement, let's get started on your own company's one. Use the form provided. Complete the top part of the income statement by writing your company's name, the words "Income Statement" just below and the words "for the period ending November 30" and begin listing expenses and amounts for your own business. Answer the questions below and record your answers on your worksheet. Click the right arrow key to continue with this lesson,
Bromley's Tuxedo Rentals Income Statement For the period ending Current Date REVENUE Sales Other Income Total Revenue EXPENSES Salary Expense Rent Expense 3,500.00 Repairs Expense 50.00 Alterations Expense 1,500.00 Dry Cleaning Expense Advertising Expense 2,000.00 Supplies Expense 150.00 Depreciation Expense 3,268.12 Insurance Expense 750.00 Miscellaneous Expense 100.00 Payroll Taxes Expense Legal And Accounting Utilities Expense 1,875.00 Bad Debts Expense Interest Expense 1,508.00 Delivery Expense Total Expenses Net Profit	Bromley's Formal Wear Income Statement For the period ending Current Date REVENUE Sales Other Income Total Revenue COST OF MERCHANDISE SOLD EXPENSES Salary Expense Rent Expense 3,500.00 Repairs Expense 50.00 Alterations Expense 1,500.00 Advertising Expense 2,000.00 Supplies Expense 150.00 Depreciation Expense 491.12 Insurance Expense 750.00 Miscellaneous Expense 100.00 Payroll Taxes Expense Legal And Accounting Utilities Expense 1,875.00 Bad Debts Expense Interest Expense 1,508.00 Delivery Expense Total Expenses Net Profit
1. A financial report that shows how much profit a company makes? Balance Sheet Chart of Accounts Income Statement	2. An income statement contains the following type of accounts. Assets and Liabilities Revenue and Expenses Expenses and Liabilities
3. Rent expense for VE companies should be? $5,000 per month $3,500 per month $6,000 per month	4. What method was used for depreciating our assets? Straight Line Sum of the Years Digits Units of Output