When it comes to preparing income statements on behalf of your corporation, great care must be exercised in order to keep information accuracy and minimise the potential risk of errors. To successfully prepare income statements, there are 5 accounting practises every accountant should bear in mind:
1. Revenues and Gains
A corporation can achieve revenue from primary and secondary activities. Revenue earned from primary activities are mostly known as operating revenues (sales revenue or service revenue) whereas revenue earned from secondary activities are known as non operating activities. This accounting practise is one of the most essential to note since beginner accountants often confuse revenues earned with receipts. These revenues are usually displayed around the top of income statements, usually in the period they are either earned or delivered- not when payment is collected. So make sure to report both operating and non operating revenues in the profit and loss statement only when the sale is made and earned.
Gains, on the other hand, is an accounting practise that is reported in income statements as the net of proceeds received from long term asset sales with the subtraction of the book value. When proceeds are more than book value, that is when the gain occurs.
2. Expenses and Losses
Much like revenues, expenses can be categorised under primary and secondary activities as well. Expenses that are incurred to earn operating revenues are considered primary activities and should show up under the same income statement where the related sales was reported, regardless of if payment has been made or not. Costs that are used up or expiring in the accounting period displayed under the income statement will also be considered to be a part of the expenses of that particular accounting period.
Certain expenses can be matched against the sales under the income statement since there is a cause and effect link, whereas others with no direct link to sales are usually matched to the period where they are used/consumed. For example: Advertising expenses are typically not linked to sales or specific accounting periods, so they are usually reported as part of expenses as soon as the advertisements occur.
Losses are often reported when there are situations where the corporation incurs a loss from long term asset sales or lawsuit results from transactions that are outside of primary activities. As part of the general accounting practises, losses are reported typically as the net of two amounts- book value minus proceed received, where the proceeds are less than book value.
3. Single Step Income Statements
One of the two most commonly used accounting practises when it comes to income statement preparation would be the single step income statement format. This particular format relies only on one subtraction to derive the net income. Take care to note that single step income statement formats involve critical information within the heading, time interval reported and precision of the time period data. One can typically expect single subtotals for revenue line items, expense line items, and a report on net gain or loss. This format is usually more suitable for businesses that rely on simple operations.
4. Multi-Step Income Statements
True to it’s name, multi step income statements usually involve multiple subtractions to compute the net income. Another most commonly practised step out of all accounting practises, one can expect details and segregation on operating revenues, operating expenses, nonoperating revenues, non operating expenses, losses, gains and gross profit.
5. Discontinued Operations Reporting
For corporations who have gone through with eliminating significant parts of their business, discontinued operations is something accountants should observe in their accounting practises. Take note that income tax expenses should be included as part of the income statement generated. Gains in discontinued corporation operations should be reduced by income tax expenses that are associated with the gain, whereas losses incurred are reduced by income tax savings associated with it.