NORTHWESTERN UNIVERSITY

Basic Education Department

Junior and Senior High School

The Statement of
Comprehensive
Income or Income
Statement shows the
result of operations for
a given period of time.
It consists of the
revenue, Cost
and Expenses

1. Natural Form- otherwise called the nature of expense method, it

presents expenses according to nature, this type of income
statement is used in a service business. It is also called the single-
step income statement since a single-step of deducting expenses
from revenue is performed to arrive at the net income or net loss.

2. Functional Form- otherwise known as the cost of sales method,

it presents expenses according to function (e.g., cost of sales,
selling expenses, administrative expenses). this type is used in a
merchandising business. It is also called the multiple-step income
statement since a series of steps is performed to arrive at the net
income or net loss.

Fundamentals of Accountancy, Business and Management

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 NORTHWESTERN UNIVERSITY
Basic Education Department
Junior and Senior High School

Comparison of the Natural Form and the Functional Form of Income Statements.

NATURAL FORM
Income from services xxx
Less: Operating Expenses xxx
Net Income/Loss xxx

FUNCTIONAL FORM
Net Sales xxx
Less: Cost of Sales xxx
Gross Profit xxx
Less: Operating Expenses xxx
Net Income/Loss xxx

Notice that in the natural form, income statement,

a single-step of deducting total expenses from total
revenues was done to get the net income/loss from
operations. However, in the functional form income
statement, a series of steps was done showing
several activities of the business before finally
arriving at the net income/loss from operations.

Fundamentals of Accountancy, Business and Management

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 NORTHWESTERN UNIVERSITY
Basic Education Department
Junior and Senior High School

includes revenues earned or generated by the business

service in performing services for a customer or client. The
income following are different examples of income and the a
ccounting term used to describe the income.

includes all payments made to employees or workers

salaries or for rendering services to the company. Examples are
wages expense salaries or wages, 13th month pay, cost of living allowance
and other related benefits given to them.

Utilities is an expense related to the use of electricity,

expense fuel, water and telecommunications facilities.

sUpplies 1. covers office supplies used by the business in the

expense conduct of its daily operations.

is the expired portion of premiums paid on

insUrance
insurance coverage such as premium paid for health or
expense life insurance, motor vehicles or other properties.

Depreciation is the annual portion of the cost of a tangible asset

such as buildings, machineries, and equipment
expense
charged as expense for the year.

means the amount of receivables charged as

Uncollectible
expense for the period because they are
accoUnts expense
estimated to be doubtful of collection.

interest a) is the amount of money charged to the borrower

for the use of borrowed funds.
expense

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 NORTHWESTERN UNIVERSITY
Basic Education Department
Junior and Senior High School

natUral Form income statement

Alex Bern Spa

Income Statement
For Year Ended December 31, 201x
NOTE
Service Revenue 454, 000
Other Income 1 61, 000
Total Income 515, 000
Expenses
Salaries 155, 000
Rent 85, 000
Depreciation 2 20, 000
Supplies 5, 000
Insurance 2, 000
Other Expenses 3 4, 000
Finance Cost 4 4, 000 275, 000
Net Income 240, 000

NOTES TO FINANCIAL STATEMENT

NOTE 1 - OTHER INCOME

Rent Income 30, 000 NOTE 3 - OTHER EXPENSES
Dividends Income 15, 000 Loss on Sale of Furniture 4, 000
Gain on Sale on Equipment 10, 000
Interest Income 6, 000
Total 61, 000 NOTE 4 - FINANCE COST
Interest Expense - Mortgage 3, 000
NOTE 2 - DEPRECIATION EXPENSE
Depreciation Expense-Building 15, 000 Interest Expense - Loan 1, 000
Total 4, 000
Depreciation Expense-Equipment 5, 000
Total 20, 000

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 NORTHWESTERN UNIVERSITY
Basic Education Department
Junior and Senior High School

Components of multi-step income statement

Ren Ren Merchandising
Income Statement
For year ended December 31, 2017

Note
Net Sales 1 xxx
Cost of Sales 2 xxx
Gross Profit xxx
Other Income 3 xxx
Total Income xxx
Operating Expenses
Distribution Expenses 4 xxx
Administrative Expenses 5 xxx
Other Expenses 6 xxx
Finance Cost xxx xxx
Net Income xxx

Net Sales
He first line after the heading of the income statement is the net sales. To show the details of its
computation, it is supported by a note to financial statement. Net sales is computed as follows:

Gross Sales xxx

Less: Sales Return and Allowances xxx
Sales Discounts xxx xxx
Net Sales xxx

Cost of Sales
The cost of sales or cost of goods sold represents the cost of merchandise inventory sold by the
business to its customers. This comprises the company’s biggest expense and is deducted from net
sales to arrive at the gross profit. Computation of cost of sales is as follows.

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 NORTHWESTERN UNIVERSITY
Basic Education Department
Junior and Senior High School

Merchandise Inventory, Beginning xxx

Add: Net Cost of Purchases
Purchases xxx
Less: Purchase Returns and allowances xxx
Purchase Discount xxx xxx
Net Purchases xxx
Add: Freight-in xxx xxx
Goods Available for Sales xxx
Less: Merchandise Inventory, End xxx
Cost of Sales xxx

Other Income
Other income is income derived from sources other than the company’s main line of business.
Examples are interest income, dividends income, commissions income, rent income, and gain on sale
of assets. To show the details of this income account, it is supported by a note to financial
statement.

Distribution Expenses/ Selling Expenses

Selling expenses are those incurred In directly selling the merchandise. This includes salaries of
sales personnel, expenses incurred in promoting or advertising the product, commissions on sales,
store supplies used, utilities used in the store, depreciation expenses of assets used in the store and
the cost of transporting the merchandise to the customer’s place of business under he account title
freight-out or delivery expense.

General /Administrative Expenses

General or administrative expenses are expenses necessary in the management of the office. This
includes the salaries of office personnel, office supplies used, utilities used in the office, depreciation
of office assets and the provision for bad debts or uncollectible accounts.
Note: If the business has a small office, does not maintain a store, and sales are also made in the
office, operating expenses need not be categorized under selling and administrative expenses.
Other expenses
Other expenses are expenses not connected to the operating activities of the business. An example
of this is loss on sale of assets and discount lost.
Finance Cost
Finance Cost are the interest expense paid for the use of borrowed funds.

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 NORTHWESTERN UNIVERSITY
Basic Education Department
Junior and Senior High School

Illustrative Problem
The following account balances are taken from the books of Ren Ren Merchandising on December
31, 2016.

Sales 782 000

Sales Returns Allowances 32 000
Sales Discounts 48 000
Purchases 220 000
Purchase Returns And Allowances 34 000
Purchase Discounts 26 000
Freight In 10 000
Merchandise Inventory, Beginning 180 000
Merchandise Inventory, End 120 000
Sales Salaries Expense 52 000
Depreciation Expense - Store Equipment 7 800
Utilities Expense - Store 6 000
Office Salaries Expense 34 000
Utilities Expense - Office 4 400
Office Supplies 3 000
Bad Debts Expense 2 000
Interest Expense 2 400
Loss On Sale Of Equipment 1 600
Discount Lost 1 000
Interest Income 30 000
Rent Income 20 000

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 NORTHWESTERN UNIVERSITY
Basic Education Department
Junior and Senior High School

Ren Ren Merchandising

Income Statement
For year ended December 31, 2016

Note
Net Sales 1 702, 000
Cost of Sales 2 230, 000
Gross Profit 472, 000
Other Income 3 50, 000
Total Income 522, 000
Operating Expenses
Distribution Expenses 4 65, 800
Administrative Expenses 5 43, 400
Other Expenses 6 2, 600
Finance Cost 7 2, 400 114, 200
Net Income 407, 800

Note 1 - Net Sales

Gross Sales 782, 000
Less: Sales Returns and Allowances 32, 000
Sales Discount 48, 000 80, 000
Net Sales 702, 000

Note 2 - Cost of Sales

Merchandise Inventory, Beginning 180, 000
Add: Net Cost
Purchases 220, 000
Less: Purchase Returns and Allowances 34, 000
Purchase Discount 26, 000 60, 000
Net Purchases 160, 000
Add: Freight-in 10, 000 170, 000
Goods Available for Sales 350, 000
Less: Merchandise Inventory, End 120, 000

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 NORTHWESTERN UNIVERSITY
Basic Education Department
Junior and Senior High School

Cost of Sales 230, 000

Note 3 - Other Income

Interest Income 30, 000
Rent Income 20, 000
Total 50, 000
Note 4 - Distribution Expense
Sales Salaries Expense 52, 000
Depreciation Expense - Store Equipment 7, 800
Utilities Expense -Store 6, 000
Total 65, 800
Note 5 - Administrative Expenses
Office Salaries Expense 34, 000
Utilities Expense - Office 4, 400
Office Supplies 3, 000
Bad Debts Expense 2, 000
Total 43, 300
Note 6- Other Expenses
Loss on Saleof Equipment 1, 600
Discount Loss 1, 000
Total 2, 600

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