Principles of Accounting

Fulbright Economics Teaching Program
2005-2006
Lecture Notes 3
Income Statement
Nguyen Bao Linh 1
Principles of Accounting
Principles of Accounting
Fulbright Economics Teaching Program
Ho Chi Minh City, Vietnam
Academic Year: 2005-2006
INCOME STATEMENT
Lecture Notes 3a
Fulbright Economics Teaching Program
2005-2006
Lecture Notes 3
Income Statement
Nguyen Bao Linh 2
Principles of Accounting
by Nguyen Bao Linh
Measuring the Business Performance
Net Income (NI) = Revenues (R) –
Expenses (E)

Revenues: the price of products,
merchandise, and services supplied by a
firm to its customers during a certain
period

Expenses: the cost of products,
merchandise, and services used by a firm
during a certain period

by Nguyen Bao Linh
Methods of Recognition

The accrual basic recognizes the impacts
of transactions on the financial
statements when revenues and expenses
occur regardless whether cash changes
hands

The cash basis only records transactions
when cash is disbursed or received
Fulbright Economics Teaching Program
2005-2006
Lecture Notes 3
Income Statement
Nguyen Bao Linh 3
Principles of Accounting
by Nguyen Bao Linh
Accounting Period

To periodically provide information to
users, the firm’s operating process is
allotted into relatively equal period,
called accounting period

The length of an accounting period may
be a month, a quarter, or a year. One-
year length is called a fiscal year
by Nguyen Bao Linh
Accounting Period


A fiscal year is not necessarily a calendar
year. The end of a fiscal year may not
coincide with the harvest in order to
– Lessen the accountant’s work at the end of
the period
– Simplify the inventory work
– Reduce the workload of allocating revenues
and expenses over various periods to account
profits accurately
Fulbright Economics Teaching Program
2005-2006
Lecture Notes 3
Income Statement
Nguyen Bao Linh 4
Principles of Accounting
by Nguyen Bao Linh
Permanent and Temporary Accounts

A temporary account is the one that will
be closed (its balance equals zero) at the
end of the accounting period to be
prepared for recording in the next
period

A permanent account is not closed at the
end of period; its ending balance
becomes the beginning one for the next
period
by Nguyen Bao Linh

Permanent and Temporary Accounts
Assets (A)
Liabilities (L)
Owners’ Equity (OE):
Capital
Withdrawals
Revenues (R)
Expenses (E)
Permanent
Accounts
Temporary
Accounts
Fulbright Economics Teaching Program
2005-2006
Lecture Notes 3
Income Statement
Nguyen Bao Linh 5
Principles of Accounting
by Nguyen Bao Linh
Matching Rule

Revenues are recognized in an accounting
period during which the firm provides
products, merchandise, and services to
customers

Expenses that are recognized in an
accounting period must been used up
during that period to generate the period
revenues

by Nguyen Bao Linh
Going-concern Rule

Firms are assumed to be continuously and
indefinitely operating unless there is
evidence on bankruptcy or stopping
business

This assumption allows accountants to
simplify their calculation and allocation of
revenues and expenses over more than
one period such as
– Deferred Revenue
– Depreciation of Fixed Assets
Fulbright Economics Teaching Program
2005-2006
Lecture Notes 3
Income Statement
Nguyen Bao Linh 6
Principles of Accounting
by Nguyen Bao Linh
Revenue Recognition

Revenues are recognized when goods and/or
services are delivered to customers regardless
whether collections have been made

To secure the matching rule, revenues are also
recorded by adjusting accounts at the end of the
accounting period

Revenue Cash
Receivables
by Nguyen Bao Linh
Expense Recognition

Expenses recognized under the matching rule must
involve in products, merchandise, or services that
have been used to generate the period revenues,
regardless whether cash changes hands

Expenses are also recorded by adjusting accounts
at the end of the accounting period
ExpenseCash
Payables