The Income Statement and Changes in Equity
The income statement (statement of performance) relates to a period of time. The regular production of an income statement allows managers to compare actual performance against the budget. The statements are normally for internal consumption only. The purpose is to measure profit, but summarising the income for that period and deducting the expenses incurred in earning that income.
Income is increases in economic benefits (increases in assets, decreases in liabilities) during an accounting period, excluding contributions by equity. Revenue is gross inflows during the period in the course of ordinary activities. Income = Revenue + Gains. Revenue = ordinary inflows. Gains = all other income. The recognition principle states that revenue should be recognised where increases in assets and reduction of liabilities have resulted from inflows of economic benefits; the earning process is substantially complete and measurable and the receipt of payment for good and services is reasonably certain.
Expenses ae decreases in economic benefits (decreases in assets, increases in liabilities) during an accounting period, excluding contributions by equity. The recognition principle is the same as for revenue. Costs of this year are usually expenses of this year. However costs of earlier years may constitute expenses in the current year (e.g., inventory) or costs of this year may be expenses in subsequent years (car registration, rates etc).
As with the case of the balance sheet the format of the income statement is influenced by the organisation's structure, size and the user of the statement.
Total AssetsTotal LiabilitiesOwner's EquityTotal RevenueTotal ExpensesNet Profit (Loss)
Earnings (or profit) management occurs when transactions are structures to achieve particular financial outcomes. The objectives may be to influence the perceptions of stakeholders about the underlying economic performance of the entity.
The purpose of the statement of changes in equity is to report all changes in equity that are taken directly from the equity section of the balance sheet together with the profit or loss for the period.