Efforts and result are usually accounted for in a way that makes accountability much easier. When an effort is put to action and resources are deployed, what the doer expect is a result which will go either for or against the doer of the action. Accountants have devised a way to measure the result of action and how resources deployed are to be accounted for.
Income statement otherwise known as Profit and loss account according to Wikipedia is one of the financial statements of a company and shows the company’s revenues and expenses during a particular period. It indicates how the revenues are transformed into the net income or net profit. Here, revenues are usually result of the activities embarked upon by an entity. It is the total amount generated by the core activities of an entity.
On one side of the income statement there are inflows. Major inflows are usually referred to by Accountants as revenues. Revenues reflect the type of activities being carried out by entity. For example, a trading activity usually sees revenue as sales, while a law office will see revenue as fees relating to legal services. So, we should not see revenue as sales alone but the most common form of revenue is sales for product entities but for services entities as they do not sell tangible items, their revenue will be more of fees and income.
There are also the possibilities that an entity will have multiple sources of revenue or some revenues that do not relate to the core activities of such entity. For example, a manufacturing company that sell a product may also have a warehouse that it sublet for additional income. Though this is quite distinct from the core activities, nothing precludes the company from recognising the rent as additional revenue when preparing the income statement.
On the other side of the income statement, there are outflows. Outflows are the resources deployed to generate income. This varies from the resources that goes into the production for the production entities and fees and income paid for services entities. Some outflows are directly related to the product or services while some are not directly related but are necessary for the fulfilment of the objectives of the entity. These outflows are generally referred to as cost.
These costs just like revenue have some that have to be paid or received within the reporting period while there are some that have to be paid in advance or owed within the reporting period. These are the prepaid or accrued costs. For revenue that are not received or received but services are yet to be offered within the reporting period are also taken into consideration. These are what we also referred to as accrued revenue or prepaid revenues.
In essence, all inflows and outflows must be reported in the period in which they related regardless of whether or not cash exchanged hands. As a matter of fact, the preceding statement is the foundation of “accrual accounting” concept. This is very important for reporting so that activities and efforts actually relate to the time that they are created.
The result of the net of inflow and outflow after proper matching is what accountants referred to as Profit (if inflows are higher than outflows) or Loss (if inflows are lower than outflows). We can then say that income statement is an account of performance because what is shown is the report of activities within a defined period of time.
If this had been a debate, at this time I should just say “I HOPE I HAVE BEEN ABLE TO CONVINCE YOU AND NOT CONFUSE YOU”.
I rest my case sir!
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