What Are The Basic Accounting Concepts Underlying The Income Statement

The Income Statement is previously called the Profit & Loss Account. This Income statement shows the revenues and expenses for the period and calculates the bottom line-net income.

The following are a few fundamental basic accounting concepts which underline the Income Statement namely:

1. Accrual concept/principle of accounting where the income statement does not coincide with the actual receipt and disbursement of cash ( namely the income statement measures profitability NOT cash flow)

2. The Revenue Recognition concept/principle requires that revenue be recognized in the financial statements when the revenue is realized and earned.

• Revenues being realized when products/services are exchanged or performed for cash or claims to cash (accounts receivable)
• Revenue being earned when an entity has substantially completed what is must do to be entitled to the benefits represented by the revenues

3. The Matching principle/concept guides how the Income Statement should recognize the expenses. It requires that expenses be matched with revenues whenever it is reasonable and practical to do so.

[ click here for article to understand the Single Step & Multiple Step Format of Income Statement]