Chapter 3, Problem

To determine

Show the income statement equation and define each element.

Explanation of Solution

Income statement:

An income statement is one of the financial statements which shows the revenues, and expenses of the company. The income statement is prepared to ascertain the net income/loss of the company, by deducting the expenses from the revenues.

$\text{Net}\text{income = Total revenues – Total expenses}$

Each element is defined as follows:

Expenses:

Expenses refer to the cost incurred on the necessary purchases of the fixed assets by the firm, or the production of the goods and services, during an accounting period. The expenses account shows a normal debit balance.

Revenues:

Revenue refers to the income received from the business activity or sale of the output, during an accounting period. The revenue account shows a normal credit balance.