Chapter 2

Elements of Income Statement Chapter 2
THE STATEMENT
OF COMPREHENSIVE
INCOME
Form of an Income
Statement
LEARNING OBJECTIVES
At the end of the chapter, students are expected to:
 Identify the elements of the Statement of Comprehensive Income.

 Describe each element of the Statement of Comprehensive Income for service business and
merchandise business.
 Differentiate the single- step approach from multi-step approach in preparing the Statement of
Comprehensive Income.
 Prepare a Statement fo Comprehensive Income for a service business using the single-step approach.
 Prepare a Statement of Comprehensive Income for a merchandising business using the multi-step
approach.
 Solve exercises and problems that require the preparation of Statement of Comprehensive Income
for a service and merchandising business.
Introduction
The Statement of Income, also known as the Income Statement or Profit and Loss Statement,
reports the company’s financial performance in terms of net profit or loss over a specified period.
If we speak about business, you can only assess its performance if you take into account certain
period as coverage, a beginning and an end, so that you will be able to draw conclusions and
decisions. That is why the date of an Income Statement is expressed as “FOR THE PERIOD COVERED
or FOR THE PERIOD ENDED or FOR THE MONTH/QUARTER/YEAR ENDED” and followed by a
certain date-e.g. For the Period Covered January to June 30, 2016 or For the quarter Ended June 30,
2016 or For Six Months Ended June 30,2016 of For the Period Ended June 30,2016.”
RDW ENTERPRISES
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2016

The Income Statement is composed of the following two elements:
1.Income -what the business has earned over a period (e.g.sales or service revenue,dividend income,interest
income,etc)
2.Expenses and Losses the cost incurred by the business over a period (e.g. salaries and wages,depreciation,rental
charges,etc),and losses incurred due to inventory obsolescence or due to fire/calamities or lawsuits.
A third item is added when a Statement of Comprehensive Income is prepared.These are:other non-operating
income and expenses that changes the capital or equity structure through the added valuation of assets of the
company like cash,investments or properties.
A net profit or loss is arrived at by deducting expenses from income.A net profit results when income exceeds
over the expenses and a net loss results when income is less than the expenses.
The Statement of Comprehensive Income on the other hand combines the income from the Income Statement
or Profit and Loss Statement and other income which are not reflected in profits and losses.Total comprehensive
income is the change in capital during a period resulting from regular transactions of the business and some other
events which changes the capital due to the following:
a.Foreign currency translation adjustments.

b.Actuarial gains and losses arising on a defined benefit pension plan.
c.Revaluations of property,plant and equipment
The Elements of Income
Statement
Revenues or Income Account
The income or revenue account comprises the actual money earned over a period of time from a job,sale of
goods or products and services,either in cash or on account.
Generally these are:
a.Revenue or income generated from the sale of a commodity or rendering of services.
b.Interests received on a bank deposits.
c.Gain on the sale of fixed assets.
d.Rental received on a leased property.
e.Professional fees earned.
Service Revenue-these are amounts earned by performing or delivering services to customers,either in cash or on
account.This includes professional or consultancy fees.
The service revenue account is used in a service business.
Rental Revenue-these are amounts earned by lessors for properties that are rented by the lessees.
Interest Income-these are the amount of interests earned from bank deposits or other form of investments.
Gain on Sale of Fixed Assets -these are gains in selling shares held as investment or gains in selling
equipment,vehicles,furniture,etc.
Sales-these are amounts earned for the sale of goods or merchandises to customers, either in cash or on account.
Sales Returns Allowances these represent goods or merchandises that are returned by customers due to defect or
other reasons
Sales Discounts-these are discounts extended to customers by either buying in bulk or being loyal to the business.
The sales,sales returns and allowances and sales discounts are accounts used in a merchandising business.
THE EXPENSES ACCOUNT

An expense is a cost incurred as part of a company's operating activities during an accounting period which
are necessary in the conduct of the trade or business.
Generally these are:

a.The cost of goods sold in a merchandising business.
b.Commissions earned by the sales employees.
c.Rent expense for the office space.
d.The cost of the electricity and water used.
e.Advertising that took place.
f.Wages and salaries that were incurred.
g.Depreciation expenses for the amortization of fixed assets.
h.Losses
Cost of Goods Sold
The cost of goods sold which are:

Purchases this account is used for various purchases of goods or merchandises that are intended for sale by a
merchandising business.
Purchase Returns Allowances -this account is used for goods or merchandises that are returned to the suppliers
for various reasons,like defect.
Purchase Discounts-these are discounts extended by the suppliers by either buying in bulk or by being loyal to
the products.
Freight In-this account is an inventoriable cost,which means that it will become part of the cost of the
products/goods that are being purchased.These are expenses paid in the delivery of the goods being purchased
and shouldered by the buyer.
Advertising expenses-these are the costs of advertising,promotion and marketing of the business.
Taxes and licenses-these are permits,licenses and other taxes paid to the government in the course of the business
operations.
Rent expense-this is the rental cost of the space occupied by the business.
Insurance expenses-these are insurance cost premiums paid for the coverage of losses of
equipment,building,furniture and one of the benefits of employees to cover death or accidents.
Light and water expenses-this account is used for the amounts of electricity and water used in the operations.
Office supplies expenses-these are the costs of office supplies consumed during the period.
Salaries,Wages & Benefits these are the amounts of salaries and benefits incurred by employees during the
period.
Gasoline expenses-these are the amounts of gasoline consumed by officers and employees during official business
travels/trips and gasoline incurred by delivery trucks and service vehicles.
Interest expenses or Finance costs-these are interest expenses charged by banks or other financial institutions or
creditors for the loans or credits.
Representation expenses-these are costs of entertaining clients in relation to business functions.
Repairs and maintenance these are expenses incurred for the repairs and maintenance of
transportation,furniture and equipment of the company
Depreciation expenses these are the amortization costs of capitalized non-current assets over the estimated
useful life of the assets.
Communication Expenses - these are telephone, cellphone, internet and other form of communication expenses
incurred by the company.
Transportation Expenses - these are fares or transportation costs incurred by the employees in line with the
business activities.
Freight Out or Delivery Expenses - these are expenses incurred by the seller in the delivery of goodsto the
customers.
Miscellaneous Expenses - this account will be used for expenses that cannot be classified in the above accounts.
Forms of an Income Statement
Like the balance sheet, the Income Statement has also two froms, namely: (a) the Single-Step Income
Statement, and (b) the Multi-Step Income Statement.
 Single-step - when all expenses are deducted from the total income. This form is used by service business.
This format of an income statement uses extremely a condensed presentation.
 Multi-step - is one which shows the different sections of the statement like the total sales, cost of sales, the
operating expenses, other income and other expenses. This form is used by merchandising business.
SINGLE STEP MULTI-STEP

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Chapter 2

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Elements of Income Statement Chapter 2

At the end of the chapter, students are expected to:

 Identify the elements of the Statement of Comprehensive Income.

a.Foreign currency translation adjustments.

The service revenue account is used in a service business.

THE EXPENSES ACCOUNT

Generally these are:

The cost of goods sold which are:

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