FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

CHAPTER 2: STATEMENT OF INCOME AND STATEMENT OF OWNER’S EQUITY

Learning Objectives:
 Identify the elements of the Statement of Comprehensive Income and describe each of these items for a service
business and a merchandising business
 Prepare a Statement of Comprehensive Income using the single-step approach and the multi-step approach
 Prepare a Statement of Changes in Equity for single/sole proprietorship

Income Statement
The income statement also called profit and loss statement, presents an entity’s result of operations for a
period of time. For example, the following should be displayed prominently:
1. The name of the reporting entity DM Trading
2. Title of the report Income Statement
3. The period of time covered by the report For the Year Ended
December 31, 2015
4. The currency (in Philippine Peso)
The income statement of a sole proprietorship shall include the following:
1. Revenue
2. Costs and Expenses
a. Cost of services or
b. Cost of goods sold
c. Selling expenses
d. Administrative expenses; and
3. Net Income or Net Loss

A common form presenting the income statement is classifying expenses according to functions. The
form starts with the revenue for the reporting period, then deducting the cost of sales to arrive at the gross
profit.

Illustration
DM Trading
Income Statement
For the Year Ended December 31, 201X5

Revenue P 3,000,000
Less: Cost of Sales 1,800,000
Gross Profit 1,200,000
Less: Distribution Costs or Selling Expenses P 300,000
Administrative Expenses 400,000 700,000

Operating Income 500,000

Add: Other Income
Less: Other Expenses 4,000
Net Income for the Year 501,000

Elements of Income Statement

Revenues
Sales or Service Income These are revenues or gross income from sale of company
products and services.
Cost of Sales and Expenses
Cost of Sales or Cost of Services These are direct cost of the products sold or the services rendered.
Salaries Expense This includes salaries of employees for services rendered.
Utilities Expense This includes telephone, water, and electricity used.
Rent Expense This includes rentals for the use of equipment, office, building,
and land spaces owned by others.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

Supplies Expense This includes laboratory, medical, and office supplies used.
Transportation Expense This includes fare for trips and travels; cost of gasoline and oil
used for company vehicles.
Depreciation Expense This includes portion of the cost of building and equipment
allocated to one accounting period.
Representation Expense This includes the amount paid to restaurants and hotels for
treating customers and others.
Interest Expense This includes interest on debts or monetary obligations.

Single-Step Income Statement (Service Business)

To illustrate a single-step income statement, here are the nominal accounts.

Liberty Medical Services

Nominal Accounts
For the Year Ended December 31, 20X1

Debits Credits
Service Income P 9,660,000
Cost of Services P 6,030,000
Salaries Expense 1,200,000
Employees’ Benefits 200,000
Professional Fees 180,000
Utilities Expense 360,000
Rent Expense 480,000
Taxes and Licenses 120,000
Supplies Expense 175,000
Advertising Expense 132,000
Transportation Expense 240,000
Depreciation Expense 60,000
Representation Expense 180,000
Interest Expense 20,000
Subtotals 9,377,000 9,660,000
Net Income 283,000
P 9,660,000 P 9,660,000

These are the steps in preparing the single-step income statement.

1. Start with a clean paper by writing the heading
a. Name of Company
b. Income Statement
c. For the _______ ended _______ (period maybe a year or less)
2. List the income account, and on the rightmost section of the paper, the amounts.
3. List the cost and expense accounts on another amounts column on the left of (2).
4. Compute the total cost and expenses.
5. Deduct total cost and expenses from the income to arrive at the net income or net loss. Write net
income on the debit column or the net loss on the credit column to balance Debits and Credits.
6. Write peso sign on the first amount in the amount column and to the totals. Draw double lines below
the totals.

Liberty Medical Services

Income Statement
For the Year Ended December 31, 20X1

Service Income P 9,660,000

Less: Cost of Services P 6,030,000
Salaries Expense 1,200,000
Employees’ Benefits 200,000
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

Professional Fees 180,000

Utilities Expense 360,000
Rent Expense 480,000
Taxes and Licenses 120,000
Supplies Expense 175,000
Advertising Expense 132,000
Transportation Expense 240,000
Depreciation Expense 60,000
Representation Expense 180,000
Interest Expense 20,000
Total Cost and Expenses 9,377,000

Net Income P 283,000

Multistep Income Statement (Merchandising Business)

To illustrate multistep income statement, listed here are the income statement accounts of Karel Trading
Company as of December 31, 20X1.

Debit Credit

Sales P 8,875,000
Sales Discount P 16,000
Sales Returns and Allowances 101,000
Purchases 4,125,000
Purchases Discounts 115,000
Purchases Returns and Allowances 118,000
Freight in 206,000
Salaries Expense 1,1218,000
Rent Expense 600,000
Utilities Expense 840,000
Bad Debts Expense 116,000
Depreciation Expense 50,000
Transportation Expense 360,000
Insurance Expense 60,000
Supplies Expense 240,000
Taxes and Licenses 180,000

Merchandise Inventory, January 1, 20X1 P 728,000

Merchandise Inventory, December 31, 20X1 P 810,000
Karel Trading Company
Income Statement
For the Year Ended December 31, 20X1

Sales P 8,875,000
Less: Sales Discount P 16,000
Sales Returns and Allowances 101,000 117,000
Net Sales 8,758,000

Less: Cost of Sales

Merchandise Inventory, January 1 P 728,000
Add: Purchases P 4,125,000
Less: Discount 115,000
Returns and Allow. 118,000 233,000
3,892,000
Add: Freight in 206,000 4,098,000

Total Goods Available for Sales 4,826,000

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

Merchandise Inventory, December 31 810,000 4,016,000

Gross Profit 4,742,000

Less:
Salaries Expense 1,1218,000
Rent Expense 600,000
Utilities Expense 840,000
Bad Debts Expense 116,000
Depreciation Expense 50,000
Transportation Expense 360,000
Insurance Expense 60,000
Supplies Expense 240,000
Taxes and Licenses 180,000 3,664,000
Net Income P 1,078,000

The Statement of Comprehensive Income (SCI) presents the statement of income information with
information as required by the Financial Accounting Standard Board (FASB) and the International
Accounting Standards Board (IASB). The SCI can be presented separately, the statement of comprehensive
income starts with the net income, plus or minus comprehensive income items on certain value change or
investment securities.

Here is an example of statement of comprehensive income. Note that the statement of comprehensive
income is discussed in advanced accounting subjects.

For the Year Ended December 31, 20X4

Net Income P 5,000,000

Other Comprehensive (loss)/income
Fair value change on available-for-sale (400,000)
Fair value change on cash flow hedge 550,000
Actuarial from defined benefit pension plans (5,000)
Currency translation differences (75,000)
Comprehensive Income P 5,070,000

Statement of Changes in Owner’s Equity (Sole Proprietorship)

To show the link of the statement of income with the statement of Financial Position, there is a need to
discuss the Statement of Changes in Equity (SCE).
In sole proprietorship, changes in equity between balance sheet dates reflect the increases and decreases
in its assets during the period resulting from
1. The net income and expenses for the reporting period (the net income or the net loss);
2. Additional investment of the owners; and
3. Distribution of owner’s equity in the form of owner’s drawings.
This section presents the statements of changes in equity for the three forms of business organization:
sole proprietorship, partnership, and corporation.

Forms of Business Organizations

An organization is defined as having two or more individuals working together toward the attainment
of a goal or goals. A business is an organization formed in any of the following:
1. Sole Proprietorship – is the simplest form of business organization. Only one individual owns the
business.
2. Partnership – is an association of two or more persons to carry on as co-owners of a business for
profit. The partnership is bound by this contract: “By the contract of partnership, two or more
persons bind themselves to contribute money, property or industry to a common fund with the
intention of dividing the profits among themselves” (Article 1767, New Civil Code).
3. Corporation – is a separate body consisting of at least five individuals and treated by law as a unit. It
is “an artificial being created by operation of law, having the right of succession and the powers,
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

attributes and properties expressly authorized by law or incident to existence” (Sec. 2, The
Corporation Code of the Philippines).

Statement of Owner’s Equity

The statement of financial position or balance sheet shows the same components of the assets and
liabilities for the three forms of business organization. The accounting equation is applied in the same
manner for sole proprietorship, partnership, and corporation.

The Accounting Equation

ASSETS = LIABILITIES + OWNER’S EQUITY
Basically the same for Basically the same for These sections vary
1. Sole Proprietorship 1. Sole Proprietorship depending on whether
2. Partnership 2. Partnership the entity is
3. Corporation 3. Corporation 1. Sole Proprietorship
2. Partnership
3. Corporation

Comparative Owner’s Equity

A. Sole Proprietorship – Sole Proprietor – Delia Jona
Capital, beginning of accounting period P 700,000
Net Income for the accounting period (Year 1) 200,000
Net (loss) for the accounting period (Year 2) (30,000)
Additional investment by the sole proprietor 140,000
Asset withdrawals or drawings by the sole proprietor (40,000)

B. Partnership
In a partnership, there are more than one owner. Assume the partners are Marko Reynes and Jose
Canlas, and the following changes happened within the accounting period:
Marko Reynes Jose Canlas
Capital Accounts changes due to
- Initial Investment P 900,000 P 600,000
- Additional investment 100,000 150,000
- Permanent decrease in capital (40,000) (80,000)
Subtotal 960,000 670,000

Drawing accounts changes due to

- Share in losses (240,000) (60,000)
- Share in Incomes 190,000 190,000
- Withdrawal of cash or other assets (30,000) (30,000)
Subtotal (80,000) 100,000
Net partners’ Equity at the end of period P 880,000 P 770,000

C. Corporation
In a corporation, there are many owners or stockholders. The equity is not shown per
individual stockholders, instead, the owners’ equity is shown as a group of stockholders.
From the general ledger, the following are the usual accounts representing
owners’ equity:
Common Stock P 10,000,000
Additional contributed capital 2,000,000
Retained earnings (Profits not yet declared as dividends
or not yet distributed to stockholders 1,500,00
Total stockholders’ Equity at the end of
Accounting period P 13,500,000
This is a simplified illustration for a corporation. Other information will be presented based
on guidelines of the International Financial Reporting Standards (IFRS).
From the information in A, B, and C, the owner’s equity will appear as follows in the
balance sheet:
A. Delia Jona owner’s equity P 970,000
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B. Reynes and Canlas Partnership

Partner’s Equity
Marko Reynes
Capital P 960,000
Drawings Br. Balance (80,000) 880,000
Jose Canlas
Capital P 670,000
Drawings Cr. Balance 100,000 770,000
Total Partners’ Equity P 1,650,000
C. Stockholders’ Equity
Share Capital
Common Stock
One million share at P10 par value per share P 10,000,000
Additional Paid-in capital 2,000,000
Total share capital 12,000,000
Retained Earnings 1,500,000
Total Stockholders’ Equity 13,500,000

Statement of Changes in Owner’s Equity – Sole Proprietorship

Expanded illustrations of owner’s equity for a sole proprietorship illustrating (A) net income and (B)
net loss are as follows:
The equity of the owner of the business in a sole proprietorship is the balance in the balance sheet
account. Owners’ Capital. The latter is given this name. For example, Greg Templo: Capital (in Templo
Trading) is expected to have a normal credit balance. It is forwarded as a beginning balance in the
succeeding accounting period. If Greg Templo: Capital has a credit balance of P 900,000 on December 31,
20X1, the carry forwarded balance on Jnuary 1, 20X2 is P 900,000. For accounting period 20X2, the P
900,000 will change as a result of transactions and events in 20X2.

Illustration
1. Net Income for 20X2 P 750,000
or
2. Net Loss for 20X2 (280,000)
3. Additional investment by Greg Templo 200,000
4. Cash Withdrawals by Greg Templo 80,000

A. Result of Operation is a Net Income

When the result of 20X2 operation has a net income of P 750,000, the statement of changes
in equity will appear as follows:

Templo Trading
Statement of Changes in Owner’s Equity
For the Year Ended December 31, 20X2

Greg Templo, Capital, January 1, 20X2 P 900,000

Add: Net Income for 20X2 P 750,000
Additional Investment 200,000 950,000
Subtotal P 1,850,000
Less:Withdrawals by Proprietor 80,000
Greg Templo, Capital December 21, 20X2 P 1,770,000

B. Result of Operation is a Net Loss

When the result of 20X2 operation has a net loss of P 280,000, instead of net profit, the
statement of changes in equity will appear as follows:

Templo Trading
Statement of Changes in Owner’s Equity
For the Year Ended December 31, 20X2

Greg Templo, Capital, January 1, 20X2 P 900,000

Add: Additional Investment 200,000
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 2

Subtotal P 1,100,000
Less:Net Loss for 20X2 P 280,000
Withdrawals by Proprietor 80,000 360,000
Greg Templo, Capital December 21, 20X2 P 740,000

TOPIC QUESTIONS AND ACTIVITIES

1. How often should income statements be prepared?
2. Which is more important
a. Statement of financial position (balance sheet) or
b. Statement of results of operation (income statement)?
3. Explain the following:
a. Balance sheet for a specific date (for example, December 31, 20X1)
b. Income statement is for a period of time (for example: For the Year Ended December 31, 20X1)
4. What are the advantages of multistep income statement over a single-step income statement?
5. Relate accounts in the income statement with those in the balance sheet. Discuss how the income
statement accounts affect balance sheet accounts.