Reporting for a service business

• Profit


  The net increase in owner's equity as a result of the firm's operation
• Calculating profit


  1. Measure the firm's revenue

  2. Deduct expenses
• Revenue


  • An increase in assets or reduction in liabilities that leads to an increase in owner's equity (except for a capital contribution)
• Expenses

  • A decrease in assets or increase in liabilities that leads to a decrease in owner's equity (except for drawings)
• Income statement


  An accounting report that details the revenue earned and expenses incurred during the reporting period
• Identifying revenue


  1. Sales journal indicates revenue earned as the service has been performed and an invoice issued

  2. Some cash receipts are also revenue as the cash received represents an inflow of economic benefits that has led to an increase in assets
• Identifying expense


  Some cash payments are expense as the cash paid represents an outflow of economic benefits in the form of decrease in bank
• Materials

  • Service firms require materials to carry out their service
  • When materials are purchased, they would be recorded as a current asset (inventory of materials)
  • Cost of material used refers to the amount of materials actually consumed or used up within the period
• Earning a net profit


  Business could still suffer a net decrease in cash position
• Incurring a net loss


  Business could still generate a net increase in cash position
• Materials purchased versus cost of materials used


  Can impact income statement and cash flow statement differently
• Credit fees versus receipts from accounts receivable

  Can impact profit versus cash
• Reporting profit or loss in the balance sheet


  • Net profit represents a net increase in owner's equity
  • Net loss represents a net decrease in owner's equity
• Uses of income statement

  • Aid decision making about the firm's operations by measuring performance
  • Assess whether the business is meeting revenue and expense targets
  • Assist in planning for future service activities
  • Assess the performance of management
• Graphical representations


  Pie charts can show vertical analysis of income statement data, presenting individual expenses as a percentage of revenue
• Net profit margin


  A profitability indicator that assesses expense control by calculating the percentage of sales revenue that is retained as net profit
• • Revenue occurs from the ordinary activities of the business
  • Under the accrual basis assumption, revenue is recognised as earned in the period in which the expected inflow of economic benefits can be measured in a faithful and verifiable manner
  • A revenue must be an increase in assets or decrease in liabilities
  • Revenue must increase what the business owes to the owner but it cannot be as a result of capital contributions
• • Expenses refers to benefits that have been consumed and are thus gone
  • Expenses represent decrease in owner equity that occurs through business activities or what a business has consumed to earn its revenue
  • An expense must be a decrease in assets or increase in liabilities