- 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!
| 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 Expense | 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.
| 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.