Question

Prepare a process documentation that

is prepared in a professional manner.

is in the form of a memorandum or as a numbered listing of items, depending on your individual preference.

includes the following elements:

a definition and description of the specific sections of the income statement

a description of the different methods of preparing income statements

an explanation of the conceptual guidelines for reporting income

how to handle the special types of income statement items

Answer 1

Answer

1. Specific Sections of Income Statements

The following will generally form part of income statement:

1. Revenue from operations
2. Other Income
3. Total income (i) +(ii)
4. Cost of goods sold/Cost of material consumed
5. Specific general and Admin expenses
6. Depreciation and Amortization
7. Finance costs
8. Tax expenses
9. Profit after tax

2. Methods of preparing income statements

There are two methods in which income statement can be prepared. They are;

1. Single-step method
2. Multi-step method

Single-step method:

Single step method simply reports revenue items as a single groups and expenses items as another group. In this way, we will arrive at net profit for the entire business segment as a whole.

For example if a company is doing business with two segments, then entire revenue generated in reported in income side. Expenses incurred in both the segment is reported under head expenses.

Multi-step method:

In the multi-step method, revenue and expenditure is grouped in to categories distinguishing the operating income and expenses with non-operating income.

In this method, income statement is structured properly. It will give three important figures (i) gross profit (ii) Operating profit and (iii) net profit.

3. Conceptual guidelines for reporting income

We have many guidelines to recognize the income. Below are few guidelines that need to be considered while accounting for revenue;

1. Income should be accrued to the entity to report the same (Accrual concept).
2. Income shall be accounted in the same period in which it has been accrued (Periodicity concept)
3. The risks and rewards should have been transferred to recognize the revenue. Performance obligation should have been completed.

4. Handling special types of income statement items

As we discussed in point (a), we have series of items in income statements which are generally applicable to company. Apart from them, some extra ordinary items may be applicable to entity. Like extra-ordinary incomes/expenses.

While handling every item in the income statement, the basic accounting concepts and principles shall be kept in mind. They shall be prepared and reported in line with financial reporting frame work.