Chapter 2 - The Income Statement (Profit and Loss Account)

Abstract

This chapter focuses on the income statement (also called the profit and loss account): what it is and what is its purpose? The income statement is a financial statement that shows the profit or loss earned by the business in a particular accounting period. The first item shown on the income statement is the revenue. This is the amount to be received from customers in return for the provision of Example's goods or services. As soon as a sale is made it is shown in the income statement, even if the money has not yet been received from the customer. The issue of revenue recognition refers to the point in time at which a particular item of revenue can be shown in an income statement. This is the application of the accruals concept, which is the principle that revenues and costs are recognized as they are earned or incurred and are matched with one another in the income statement of the period to which they relate, irrespective of when the cash is actually received or paid out.