Preparing the Income Statement for Merchandising Business : Multiple-Step Format
Income Statement for Merchandising Business
According to Investopedia (n.d.), an income statement is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.
Even though both merchandising companies and service companies conform to generally accepted accounting principles, or GAAP, there are differences in the way each type of firm prepares its financial statements. With respect to the income statement, most differences center around the existence of inventory.Both merchandising companies and service companies prepare income statements to help investors, analysts and regulators understand their internal financial operations. Merchandising companies hold and account for product inventory, which makes their income statements inherently more complicated. Much of the inventory calculation is manifested through the line item cost of goods sold, which is an expense account describing the cost of purchasing inventory and delivering it to customers. But If you look at an income statement for a service company, you will not see a line item for cost of goods sold.
KEY CONCEPTS TO REMEMBER WHEN PREPARING THE MULTIPLE-STEP FORMAT INCOME STATEMENT:
Sales - Amount of money that the business received after selling merchandise.
Contra Revenue/Sales Accounts - These are the accounts that lessen the value of the Sales account namely Sales Returns and Allowances and Sales Discounts.
Net Sales - The difference of Sales account and Contra Revenue/Sales accounts.
Merchandise Inventory Beginning - The recorded cost of inventory at the beginning of an accounting period.
Purchases - Amount of money that the business used for buying additional merchandise. Freight-in - The shipping cost to be paid by the buyer of merchandise purchased when the terms are FOB shipping point (Investopedia, n.d.).
Total Purchases - The sum of Purchases account and Freight-in.
Contra Purchases Accounts - These are the accounts that lessen the value of the Purchases account namely Purchase Returns and Allowances and Purchase Discounts.
Net Purchases - The difference of Purchases account and Contra Purchases accounts.
Goods Available for Sale - The sum of Merchandise Inventory Beginning and Net Purchases.
Merchandise Inventory Ending - The recorded cost of inventory at the end of an accounting period.
Cost of Sales - The difference of Goods Available for Sale and Merchandise Inventory Ending.
Gross Profit on Sales - The difference of Net Sales and Cost of Sales.
Operating Expenses - Expenses of the the business that are required to be paid in order to maintain operation (includes Salary & Wages, Taxes and Licenses, Freight-out, etc) (Investopedia, n.d.)
Net Profit/Loss from Operation - The difference of Gross Profit on Sales and the Operating Expenses.
PROCEDURES TO FOLLOW WHEN PREPARING THE MULTIPLE-STEP FORMAT INCOME STATEMENT:
(NOTE: 1) A 4-COLUMN WORKSHEET IS TO BE USED WHEN PREPARING THE MULTIPLE-STEP FORMAT INCOME STATEMENT. 2) PUT HYPHEN AT THE THE END OF EVERY VALUE OF THE ACCOUNTS IF THERE WILL BE NO CENTAVO TO BE RECORDED.)
To begin, start at the heading wherein you will write the name of the business at the most top in all CAPITAL LETTERS then write "Income Statement" below it and then write "For the period ended/ For the month ended, month then the last day of the month then comma (') and then write the year." Now for the content proper. First step, record Sales and its value would be written at the 4th column of the row with a peso sign since it is the first account recorded in the document. Second step, write "Less: then the Contra Revenue/Sales Accounts" and deduct it from the Sales account just in cases wherein there are Contra Revenue/Sales Accounts" such as Sales Returns and Allowances and Sales Discounts. If there are Contra Revenue/Sales Accounts, their value would be record at the 3rd column and put a peso sign to whichever will be written first in the 3rd column then the total of Contra Revenue/Sales Accounts will be written beside to whichever will be recorded last but the total would not be necessary if the Contra Revenue/Sales Accounts being recorded is only 1. Third step, minus the value of Sales account to the total of Contra Revenue/Sales Accounts then the difference would be record under Net Sales with a peso sign. Fourth step, write "COST OF SALES" under the Net Sales account. Fifth step, record the Merchandise Inventory Beginning as "Merchandise Inventory then Month then the first day of the month then comma then the year" and its value would be recorded at the 3rd column. Sixth step, record Purchases then write the value at the 2nd column with a peso sign. Seventh step, write "Add: Freight-in" then write the value under the value of Purchases then put a single line/rule under it (only applicable if there is a Freight-in account). Eighth step, add the value of Purchases with the Freight-in and the sum will recorded as Total Purchases and its value is recorded with a peso sign. Ninth step, record "Less: then the Contra Purchases Accounts" if there are then write their total beside the last account to be written and a peso sign on the first account to be written then put a single line/rule below the values covering up columns 1 and 2. Tenth step, minus the total Contra Purchases Accounts from the Purchases account and write the value back in 3rd column and put a single line/rule under the value and record it as Net Purchases. Eleventh step, add the value of Merchandise Inventory Beginning and the Net Purchases, write the value under the 3rd column and it will be recorded as Goods Available for Sale. Twelfth step, write "Less: then the Merchandise Inventory Ending" and its value written at the 3rd column and put a single line/rule under the value. Thirteenth step, minus the Merchandise Inventory Ending from the Goods Available for Sale then record it as the Cost of Sales and write the value under the 4th column with a single line/rule below. Fourteenth step, deduct the Cost of Sales from the Net Sales and write the value at the 4th column and it will be recorded as the Gross Profit on Sales. Fifteenth step, write "Less: Operating Expenses then the kinds of operating expenses that the business is paying" under the word "Operating Expenses", add all of the operating expenses then write their total at the 4th column beside the value of the last operating expense recorded then put a single line/rule under covering up the 3rd and 4th column. Sixteenth and last step, deduct the total of the Operating Expenses to the Gross Profit on Sales and write the value under the 4th column with a peso sign and a double line/rule below and record it as Net Profit from Operation if the difference will be a positive value but if the value will result to a negative value, record it as Net Loss from Operation then the value and peso sign will be written inside a parenthesis but the double line/rule will remain. Now, you are done with your multiple-step format income statement for merchandising business.
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SCREENSHOTS OF THE SITES/VIDEOS I USED FOR SOURCES:
REFERENCES:
http://www.investopedia.com/terms/i/incomestatement.asp
https://www.youtube.com/watch?v=QWCJPPGM5w8
http://www.investopedia.com/ask/answers/102714/what-are-differences-between-income-statements-merchandising-companies-vs-service-companies.asp
https://e.edim.co/27166275/Y5fX5RKQ9F84ghKG.pdf?response-content-disposition=filename%3D%22grade_10_income_statement_and_balance_sheet_preparation.pdf%22%3B%20filename%2A%3DUTF-8%27%27grade%252010%2520income%2520statement%2520and%2520balance%2520sheet%2520preparation.pdf&Expires=1489361704&Signature=COG5RZVVwpFnhUnQ3aDaMKNJjx-G3C3v2RrRft9sr8H16gRUPhSI3Bc0Jr5mouuP2uZVJXfZHytO-eB-d9U89Qjj8ZjmqsZWndSG28OIMypZy0khZBh0tJEB89fec0hynozWCxcdlQsK-Ly9d3-1-Hkyp1Spbu9v5T2g1xntj2~lsnvi99G4KUNUOeH0USdp2-LCjzyK~P~EeJq3Gm5zLRYyTR6tDZYd26b9UiCUmK83D8XAyrTXnYkvYuo9dbu~CkCB8rHn9uxvIKB2oGV27pLx9LVxWrEcl3KrghqU9FiWeVM~sIBgbf5MMjm7d20RtYnHvbgQ-gsSeFyYrIgwgw__&Key-Pair-Id=APKAJMSU6JYPN6FG5PBQ
These are the websites that helped me to define what an Income Statement is. Also, it helped me to identify the key concepts to remember and the principles & procedures to follow in preparing the Multiple-Step Format Income Statement.
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Learning Reflections
Preparing the income statement was hard for me because I should follow so many complicated procedures and principles first before finishing the whole income statement. I was really struggling with understanding the concepts of income statement and one time, I was really upset because I can't understand a single thing and I just wanted to give up but after a few days I realized that giving up will bring no good things to me so instead of stopping in studying how to prepare an income statement, I studied harder and try to learn everything about income statement as much as possible.
Summary
In the end, I just realized that I should not give up on anything especially when it comes to my studies because all of the things that I will learn in school will be very functional in the future and one day when I'm already a successful individual, I think that I would just tell myself that "all my hard work payed off and all of the hardships that I have suffered from is worth because I wouldn't become a successful man without the lessons I have learned in school." Thanks to the struggle of preparing the income statement, I was able to teach myself another life lesson which is to not give up on things because I just realized recently that good things come to those who have patience, courage and passion for their work.