Cash Flow From Assets Involves Which Of The Following Components Basic Accounting Concepts – Income Statement

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Basic Accounting Concepts – Income Statement

Success in learning accounting depends on a correct understanding of the fundamental accounting concepts that underlie theory and practice. One concept to learn and understand is the income statement, which will be described and explained below.

The concept

Income Statement is one of the three main financial statements, it also includes Balance Sheet and Cash flow statement. This financial statement shows the changes in the financial position of the company for a specific period of time, i.e. month, quarter or year. This statement reflects a net profit, i.e. an increase in equity capital, or a net loss, i.e. a decrease in equity capital, during a given period.

Income Statement is related to Balance Sheet in terms of the net profit for the period, that is, the profit for the period from this financial statement goes to Balance Sheet as an increase or decrease Retained earnings (the result is not distributed to shareholders as dividends).

Items included

According to the structure Income Statement, it is important that this statement not only states the net result for the period, but also the components that make up that result. This statement will therefore include the following:

  • Income: amounts earned for goods sold or services rendered
  • Cost of sales: costs of goods sold or services rendered. In the event that only goods are sold, this article is called Cost of goods sold. All costs directly related to earned income are included here

  • Gross profit: the difference between the two mentioned items, which show how much the company earns from its main activities

  • Business expense: these items consist of costs that cannot be directly linked to the cost of goods sold or services rendered. Examples can be the salaries of accountants, rent of administrative premises and others

  • Business profit: the difference between Gross profit and Business expense

  • Interest costs: these costs are shown separately to indicate the financial costs the company is incurring and whether it is earning enough profit to pay interest on time

  • Net profit (loss): this is the net result for the period. If it is positive, we have a profit. If it is negative, we have a loss.

It is important to note that Income Statement is usually prepared on an accrual basis, which means that revenues and related expenses are recognized despite the fact that money has not yet been paid or received, but based on the obligation of customers to pay for goods sold or services rendered, and based on the company’s obligations to pay its obligations.

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