CHAPTER 2

Statement of Income and

Statement of Owner's
Equity
 Learning Objectives
In this chapter, you should be able to:
• Identify the elements of the statement of
income for a service business and
merchandising business;
• Prepare statement of income for a service
business using the single-step approach;
• Prepare a statement of income for a
merchandising business using the multistep
approach;
• Discuss the different forms of business
organization; and;
• Prepare statement of changes in equity for a
single proprietorship.
When the
pandemic hit in
2020, about 26%
of businesses in
the Philippines
closed, and many
workers were laid
Some Filipinos who
lost their jobs
chose to put up
their businesses.
Most first-time
business owners did
not know how to
track their
business's
profitability.
 What basic financial
reports do enterprises
need to monitor their
income and expenses?
What tools are
required to assess
whether a business
earns income or incurs
How will you differentiate
the use of the single-step
approach and the multi-
step approach of a
statement of
comprehensive income?
Income Statement
• The income statement,
also called profit and loss
statement, presents a
entity's result of
operations for a period of
time.
 the name of the
reporting entity DM Trading

title of the report Income Statement

the period of time For the Year Ended Dec..

covered by the
report 31, 20X5

the currency (in Philippine Peso)

• The income statement of a sole
proprietorship shall include the
following:
⚬ Revenue
⚬ Costs and expenses
￭ cost of services or
￭ cost of goods sold
￭ selling expenses
￭ administrative expenses
⚬ Net income or net loss.
￭ A common form of
presenting the income
statement is classifying
expenses according to
functions. The form starts
with the revenue for the
reporting period, then
deducting the cost of sales
to arrive at the gross
⚬ Other Comprehensive Income
(OCI)
￭ consists of all unrealized
gains and losses that are
not reflected in the income
statement
 Functions of Income Statement
• To assess the profitability and value of investment
• To determine the creditworthiness of a company.
• To provide insights on how the company utilizes its assets
to create wealth an investment analysis tool
• Summary of the revenue information
• Uses accrual method instead of cash basis
• Wrong information if proper timing and reasonable
valuation are ignored
 Elements of Income Statement
Revenues
• Sales or Service Income - These are revenues or gross income from
sale of company products and services.
Cost of Sales and Expenses
• Cost of Sales or Cost of Services - These are direct cost of the
products sold or the services rendered.
• Salaries Expense - This includes salaries of employees for services
rendered.
• Utilities Expense - This includes telephone, water, and electricity
used.
• Rent Expense - This includes rentals for the use of equipment,
office, building, and land spaces owned by others.
 Elements of Income Statement
Cost of Sales and Expenses
• Transportation Expense - This includes fare for trips
and travels; cost of gasoline and oil used for
company vehicles.
• Depreciation Expense - This includes portion of the
cost of building and equipment allocated to one
accounting period.
• Representation Expense - This includes the amount
paid to restaurants and hotels for treating customers
and others.
 Elements of Income Statement

Income/Revenue Expenses

The total amount The total amount of

that the business money spent or
generated from incurred by a
rendering services business to
to the customers generate income
 Elements of Income Statement

Net Income Net Loss

The positive result The negative result

where the total where the total
revenues are expenses are
greater than the greater than the
total expenses total revenues
Single–Step
Income
Statement
(Service
Business)
 Single–Step Income Statement (Service
Business)

• the simpler way of presenting a

business’s income statement
• ideal for presenting the financial
performance of service businesses
 Single–Step Income Statement (Service
Business)

• Start with a clean paper by writing the heading.

⚬ Name of the Company
⚬ Income Statement
⚬ For the ended (period maybe a year or less)
• List the income account, and on the rightmost section of
the paper, the amounts.
• List the cost and expense accounts in another amount’s
column on the left of (2).
• Compute the total cost and expenses.
 Single–Step Income Statement (Service
Business)

• List the cost and expense accounts in another amount’s

column on the left of (2).
• Compute the total cost and expenses.
• Deduct total cost and expenses from the income to arrive
at the net income or net loss. Write net income on the
debit column or the net loss on the credit column to
balance Debits and Credits.
• Write the peso sign on the first amount in the amount’s
column and on the totals. Draw double lines below the
totals.
 MULTISTEP INCOME STATEMENT (MERCHANDISING
BUSINESS)

To illustrate multistep income statement, listed here are the income

statement accounts of Karel Trading Company as of December 31, 20X1
 Statement of Comprehensive Income
(SCI)
The Statement of
Comprehensive Income (SCI)
presents the statement of
income information with
information as required by
the Financial Accounting
Standard Board (FASB) and
the International Accounting
Standards Board (IASB). The
SCI can be presented
separately or in combination
with the statement income.
 Statement of Changes in Owner's Equity
(Sole Proprietorship)

In a sole proprietorship, changes in equity between

two balance sheet dates reflect the increases and
decreases in its net assets during the period resulting
from
1. the net of income and expenses for the reporting
period (the net income or the net loss);
2. additional investment of the owners; and
3. distribution of owner's equity in the form of owner's
drawings.
 Forms of
Business
Organizations
Forms of Business Organizations

• An organization is defined as having two or more

individuals working together toward the
attainment of a goal or goals.
• A business is an organization formed in any of
the following:
⚬ Sole Proprietorship - is the simplest form of
business organization. Only one individual
owns the business.
Forms of Business Organizations

⚬ Partnership-is an association of two or more

persons to carry on as co-owners of a business
for profit. The partnership is bound by than
contract: "By the contract of partnership, two
or more persons bind themselves to contribute
money, property or industry to a common fund
with the intention of dividing the profits among
themselves" (Article 1767, New Civil Code).
Forms of Business Organizations
⚬ Corporation-is a separate body consisting of
at least five individuals and treated by law
as a unit. It is "an artificial being created by
operation of law, having the right of
succession and the powers, attributes, and
properties expressly authorized by law or
incident to its existence" (Sec. 2, The
Corporation Code of the Philippines).
Statement of Owner's Equity
The statement of financial position or
balance sheet shows the same
components of the assets and liabilities for
the three forms of business organization.
The accounting equation is applied in the
same manner for sole proprietorship,
partnership, and corporation.
 The Accounting Equation
(ASSETS = LIABILITIES + OWNER’S
EQUITY)

ASSETS =
• Basically the same for
⚬ Sole Proprietorship
⚬ Partnership
⚬ Corporation
 The Accounting Equation
(ASSETS = LIABILITIES + OWNER’S
EQUITY)

LIABILITIES +
• Basically the same for
⚬ Sole Proprietorship
⚬ Partnership
⚬ Corporation
 The Accounting Equation
(ASSETS = LIABILITIES + OWNER’S
EQUITY)

OWNER'S EQUITY
• These sections vary depending on
whether the entity is me for
⚬ Sole Proprietorship
⚬ Partnership
⚬ Corporation
 Comparative Owner's Equity
Sole Proprietorship - Sole Proprietor - Delia Jona
Capital, beginning of accounting period P 700,000

Net income for the accounting period (Year 1) 200,000

Net (loss) for the accounting period (Year 2) (30,000)

Additional investment by the sole proprietor 140,000

Asset withdrawals or drawings by the sole (40,000)

proprietor
 Comparative Owner's Equity

Partnership - Marko Reynes & Jose Canlas

Marko Reynes Jose Canlas

Capital Accounts changes due

to:
• Initial investment P 900,000 P 600,000
• Additional investment 100,000 150,000
• Permanent decrease in (40,000) (80,000)
capital

Subtotal 960,000 670,000

 Comparative Owner's Equity
Partnership - Marko Reynes & Jose Canlas

Marko Reynes Jose Canlas

Drawing accounts changes

due to
• Share in losses (240,000) (60,000)
• Shares in incomes 190,000 190,000
• Withdrawal of cash/other (30,000) (30,000)
assets

Subtotal (80,000) 100,000

Net partners' Equity at end

Partnership of Reynes & Jose Canlas
- Marko P 830,000 P 770,000
period
 Comparative Owner's Equity

Corporation
• Common stock
• Additional contributed capital P 10,000,000
• Retained earnings (Profits not yet 2,000,000
declared as dividends or not yet 1,500,000
distributed to stockholders)

Total Stockholders' Equity P 13,500,000

at the end of Accounting period
 Comparative Owner's Equity

Corporation
Delia Jona owner's equity P 970,000
Reynes and Canlas Partnership
• Partners' Equity
⚬ Marko Reynes
￭ Capital P 960,000
￭ Drawings Dr. Balance (80,000) P 880,000
⚬ Jose Canlas
￭ Capital P 670,000
￭ Drawings Cr. Balance 100,000 770,000

Total Partners' Equity P

1,650,000
 Comparative Owner's Equity

Corporation
Stockholders' Equity
• Share Capital
• Common Stock
• One million shares at P10 par value P 10,000,000
per share 2,000,000
• Additional Paid-in capital P 12,000,000
• Total share capital
• Retained Earnings 1,500,000
Total Stockholders' Equity P 13,500,000
 Statement of Changes in Owner's Equity - Sole
Proprietorship

• Net Income for 20X2 or

P 750,000
• Net Loss for 20X2
(280,000)
• Additional investment by Greg
Templo 200,000

• Cash withdrawals by Greg 80,000

Templo
 Result of
Operation Is a
Net Income