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The document defines key terms and concepts related to the statement of comprehensive income (income statement) for service and merchandising businesses. It explains that the income statement contains the results of a company's operations for a period of time and can be prepared monthly, quarterly, or annually. Temporary accounts found on the income statement are reset to zero at the end of the accounting period. The document also describes the single-step and multi-step formats for income statements and provides examples of revenue, expense, and inventory accounts for service and merchandising businesses.

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23 views

Fabm Reviewer

The document defines key terms and concepts related to the statement of comprehensive income (income statement) for service and merchandising businesses. It explains that the income statement contains the results of a company's operations for a period of time and can be prepared monthly, quarterly, or annually. Temporary accounts found on the income statement are reset to zero at the end of the accounting period. The document also describes the single-step and multi-step formats for income statements and provides examples of revenue, expense, and inventory accounts for service and merchandising businesses.

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治太宰
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© © All Rights Reserved
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STATEMENT OF COMPREHENSIVE INCOME (INCOME STATEMENT)

● also known as the income statement.


● Contains the results of the company’s operations for a specific period of time which is
called net income if it is a net positive result while a net loss if it is a net negative result.
● Revenues/ Sales Less Expenses is equivalent to Net Income
This can be prepared for a month, a quarter or a year. (Haddock, Price, & Farina, 2012)
Accrual – accrued income, accrued expense
Revenues – service income, sales
Expenses – salaries expense, depreciation expense
Service business – school, repair shop
Merchandising business – sari-sari store, vegetable vendor
TEMPORARY ACCOUNTS
also known as nominal accounts are the accounts found under the SCI. They are called such
because at the end of the accounting period, balances under these accounts are transferred to
the capital account, thus having only temporary amounts and resulting to zero beginning
balances at the beginning of the following year.(Haddock, Price, & Farina, 2012)
Examples of temporary accounts; revenues, sales, utilities expense, supplies expense,
salaries expense, depreciation expense, interest expense among others.

SCI FORMAT
Single-step – all revenues are listed down in one section while all expenses are listed in
another. Net income is computed using a “single-step” which is (Total Revenues-Total
Expenses)
Multi-step – there are several steps needed in order to arrive at the company’s net income.
(Haddock, Price, & Farina, 2012)
The two formats will yield the same amount of net income/loss. The single-step SCI is more
commonly used by service companies while multi-step format is more commonly used by
merchandising companies

A service company provides services in order to generate revenue and the main cost
associated with their service is the cost of labor which is presented under the account Salaries
Expense.
A merchandising company sells goods to customers and the main cost associated with the
activity is the cost of the merchandise which is presented under the line item Cost of Goods
Sold.

Sales – the total amount of revenue that the company was able to generate from selling
products.
Contra revenue – it is on the opposite side of the sales account. The sales account is on the
credit side while the reductions to sales accounts are on the debit side. This is “contrary” to the
normal balance of the sales or revenue account
Sales returns – This account is debited in order to record returns of customers or allowances
for such returns Sales returns occur when customers return their products for reasons such as
but not limited to defects or change of preference.
Sales discount – This is where discounts given to customers who pay early are recorded.
known as cash discount. This is different from trade discounts which are given when customers
buy in bulk. Sales discount is awarded to customers who pay earlier or before the deadline.
Cost of Goods Sold – This account represents the actual cost of merchandise that the
company was able to sell during the year.
Beginning inventory – is the amount of inventory at the beginning of the accounting period. is
also the amount of ending inventory from the previous period.
Net Cost of Purchases = Purchases + Freight In
Net Purchases = Purchases – (Purchase discount and purchase returns)
Purchases – amount of goods bought during the current accounting period.
Contra Purchases – account that is credited being “contrary” to the normal balance of
Purchases account.
Purchase discount – Account used to record early
payments by the company to the suppliers of merchandise. This is how buyers see a sales
discount given to them by a supplier.
Purchase returns – Account used to record merchandise returned by the company to their
suppliers. this is how buyers see a sales return recorded by their supplier
Freight In – This account is used to record transportation costs of merchandise purchased by
the company, this is recorded when goods are transported into the company.
Add Beginning inventory and Net cost of Purchases to get Cost of Goods Available for
Sale
Ending inventory – amount of inventory presented in the SFP. Total cost of inventory unsold at
the end of the accounting cycle.
Sales less Cost of Goods Sold is Gross Profit
General and Administrative Expenses –These expenses are not directly related to the
merchandising function of the company but are necessary for the business to operate
effectively.
Selling Expenses – These expenses are those that are directly related to the main purpose
of a merchandising business: the sale and delivery of merchandise. This does not include
cost of goods sold and contra revenue accounts.
Gross Profit less General and Administrative Expenses less Selling Expenses is Net
Income for a positive result while Net Loss for a negative result.

a. Salaries of admin personnel- General and Admin


b. Salaries of janitors- General and Admin
c Salaries of sales agents- Selling
d. Utilities of home office- General and Admin
e. Rent of office building- General and Admin
f. Depreciation of office equipment- General and Admin
g. Depreciation of delivery van- Selling
h. Advertising- Selling
i. Cost of merchandise sold during the year- COGS

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