Understanding Profit and Loss Statements and Income Statements

In accounting, revenue and expense can be recognized through two methods:

1. Accrual method: Income is recognized as and when it is billed, even if cash has not been received yet.
2. Cash basis accounting: Income and expenses are recognized when cash is actually received or paid, respectively.

In the income statement, the accrual method is followed, which means that revenue and expense are recorded as they are earned and incurred, respectively.

• Business Entity Assumption: A business's transactions are kept separate from those of its stakeholders, except for sole proprietors.
• Monetary unit assumption: Transactions in the income statement are not adjusted for inflation.

In the income statement, a business's expenses and income are recorded separately from its stakeholders, except in the case of sole proprietors. This helps to accurately track the financial performance of the business.

Additionally, the transactions in the income statement are not adjusted for inflation, meaning that they are recorded at their original value

Cost Principle: Transactions are recorded at their original cost, not market value.

Going Concern Principle: Transactions are recorded as if the business will continue indefinitely.

Any business generates assets that are then sold off to create revenue. As per the matching principle, only the expenses which are related to the realized sales are treated as expenses

Generally, there are two types of expenses.

Operating expenses : General expenses involved in functioning of a business. Eg: rent, purchase of Raw materials, cost of conversion, marketing costs, salary, electricity expenses etc

Non-operating expenses: Expenses involving depreciation, interest on loansetc.

Revenue- expenses= Profit earned