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What is the income statement, matching principles and revenue recognition?

Updated: Feb 6

In this article, I will introduce you to the Income Statement and Match Principal and Revenue Recognition in plain, easy, and straightforward English. It also requires some basic understanding of the Normal Balance of each account on the balance sheet. For example, what is the normal balance of the Cash account, dr. or cr.? I assume you already know some of the basics but still need clarification with the income statement side here.


What is Income Statement?

Income Statement is one of the financial statements to tell you what happened during the period of time.


Unlike the balance sheet, for example, only focus on the point of time. Typically, if you are an accounting student, when you look at the balance sheet of a company, you will see the first title is the company’s name, second one is the financial statement’s name, which is here, the balance sheet. The third one under the balance sheet, is the date, for example, “As at Oct 31st, 2023”, and that’s the snapshot of a company’s assets, liabilities and equities as of the day when you access it.



But for the Income Statement, the title of date is " For year ended Month-Day, Year." Although it can’t tells you everything, it can tell you the company’s sales and expenses associated with those sales during the period. You can also use these numbers to calculate the ratios, margins in order to analyse a company’s performance during its fiscal years.





Expand the following two core items that you need to learn here:



Matching principle: When you are creating a company’s income statement, it is under the Matching Principle.


Revenue Recognition: The company should record the revenue immediately upon delivery or service performance, regardless of cash received.




The following four practical examples can assist you in applying the knowledge you have just learned above to these questions:


Spreadsheet Example 1 - When to record cash and revenue?

Spreadsheet Example 2 - Balance sheet equation

Spreadsheet Example 3 - Revenue Recognition

Spreadsheet Example 4 - Balance sheet equation


           

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