# The income statement is the financial statement that

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The income statement is the financial statement that reports a company's revenues andexpenses and the resulting net income. While the balance sheet is concerned with one point in time,the income statement covers a time interval or period of time. The income statement will explain partof the change in the owner's or stockholders' equity during the time interval between two balancesheets. Net income is computed as follows:NET INCOME = REVENUESOPERATING EXPENSESREVENUES:the mechanisms where income enters the company (note that revenue andincome are not the same thing--they are used here to describe each other in basic termsonly).EXPENSES:the costs of doing business. Examples include: salary expense, rent, utilitiesexpense, and interest on borrowed money.NET INCOME: is the amount of money that a company earns after covering all of its costs.2.2EXPANDED ACCOUNTING EQUATIONThe expanded accounting equation provides more details for the owner's equity amountshown in the basic accounting equation. The expanded accounting equation for a sole proprietorshipis: Assets = Liabilities + Owner's Capital + RevenuesExpensesOwner's Draws.The expanded accounting equation allows you to see separately (1) the impact on equityfrom net income (increased by revenues, decreased by expenses), and (2) the effect of transactionswith owners (draws, dividends, sale or purchase of ownership interest).This equation sets the foundation of double-entry accounting and highlights the structure ofthe balance sheet. Double-entry accounting is a system where every transaction affects both sidesof the accounting equation. For every change to an asset account, there must be an equal change toa related liability or shareholder’sequity account. It is important to keep the accounting equation inmind when performing journal entries.2.3 DOUBLE ENTRY BOOKKEEPING SYSTEMDefinition of Double-Entry SystemThe double-entry system of accounting or bookkeeping means that for every businesstransaction, amounts must be recorded in a minimum of two accounts. The double-entry system alsorequires that for all transactions, the amounts entered as debits must be equal to the amountsentered as credits.Debits and credits may be derived from the fundamental accounting equation. They resultfrom the nature of double entry bookkeeping. Two entries are made in each balanced transaction, a
Learning Module for Independent Learning21debit and a credit. This allows the accounts to be balanced to check for entry or transactionrecording errors.Rules of Debit and CreditAn account will have either a "normal credit balance" or a "normal debit balance", dependingon the type of account. The normal balance indicates which side of the account the amount goes towhen the account balance increases. Assets, Expenses and Withdrawals have normal debitbalance, while Liabilities, Owner’s Equity, Contra-assets, and Revenues have normal credit balance.

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