1.09 – Tracking the Income Statement Accounts
The income statement consists of two main types of accounts: revenue and expenses. These accounts help determine whether a business made a profit or a loss over a specific period. This section delves into the various accounts that form the income statement portion of the Chart of Accounts.
Recording the Money You Make
The first set of accounts in the income statement tracks the revenue coming into the business. This includes sales, discounts, returns, and other income sources.
- Sales of Goods or Services: Tracks all income earned from selling products or services.
- Sales Discounts: Records any reductions in price offered to encourage sales.
- Sales Returns: Captures transactions when customers return products.
In addition to sales-related income, other revenue accounts include:
- Other Income: For income from sources outside the primary business activities, such as recycling revenue.
- Interest Income: Tracks interest earned on savings or loans made by the company.
- Sale of Fixed Assets: Records revenue from selling fixed assets, minus accumulated depreciation.
Tracking the Cost of Goods Sold
Before selling a product, money is spent to acquire or produce it. The Cost of Goods Sold (COGS) accounts track these expenses:
- Purchases: Tracks the cost of items bought for resale.
- Purchase Discount: Records discounts received from vendors for early payment.
- Purchase Returns: Captures the value of returned purchased items.
- Freight Charges: Includes shipping costs for items purchased.
- Other Sales Costs: A catchall for miscellaneous sales-related costs.
Acknowledging the Money You Spend
Expense accounts cover all business expenditures not directly tied to product sales. These accounts vary widely based on business operations.
- Advertising: Tracks costs of promoting the business, including media ads and printed materials.
- Bank Service Charges: Records fees charged by banks for account services.
- Dues and Subscriptions: Captures expenses for memberships and magazine subscriptions.
- Equipment Rental: Tracks short-term equipment rental costs.
- Insurance: Records premiums paid for various insurance policies.
- Legal and Accounting: Captures costs for professional legal and accounting services.
- Miscellaneous Expenses: A general account for expenses that don’t fit elsewhere, potentially reclassified if frequently incurred.
- Office Expense: Tracks office supplies and other operational items.
- Payroll Taxes: Records employer-paid taxes for employee payroll.
- Postage: Captures expenses for stamps and shipping, with options for vendor-specific tracking.
- Rent Expense: Tracks rental costs for office or retail spaces.
- Salaries and Wages: Records employee compensation.
- Supplies: Captures non-office supplies needed for business operations.
- Travel and Entertainment: Tracks business-related travel and entertainment expenses, often detailed into specific categories.
- Telephone: Records telephone-related expenses.
- Utilities: Tracks costs for electricity, gas, water, etc.
- Vehicles: Captures expenses related to company vehicles.
Practical Tips for Income Statement Accounts
- Organized Tracking: Ensure all revenue and expense accounts are well-documented to provide a clear financial picture.
- Custom Categories: Tailor the accounts to match your specific business needs, adding or adjusting categories as necessary.
- Regular Reviews: Periodically review and update accounts to maintain accurate and relevant financial tracking.
By meticulously tracking revenue and expenses, the income statement provides valuable insights into a business’s financial health, aiding in informed decision-making and effective financial management.
