Income statement and accounting

• the two types of expense :

  product costs

  period costs
• Product costs: directly related to products they help generate; for example, direct labour, materials used

   
• Period costs: indirect costs not directly associated with a product, also related to time period costs; for example, rent, advertising expenses
• the underlying concepts :

  matching principle

  conservatism or prudence principle
• income statement format:

  sales

  cost of goods sold

  gross profit

  operating expenses :

  rent, electricity, salary

  other SG&A expense

  operating income:

  interest, gains and losses

  pre tax income

  income tax expense

  net income
• accounting conventions & the income statement

  • accruals convention
  • matching convention
  • prudence convention