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.