2. There are two income statement formats that are generally prepared.

Single-step income statement – the single step statement only shows one category of income
and one category of expenses. This format is less useful of external users because they can't
calculate many efficiency and profitability ratios with this limited data.
Multi-step income statement - the multi-step statement separates expense accounts into more
relevant and usable accounts based on their function. Cost of goods sold, operating and non-
operating expenses are separated out and used to calculate gross profit, operating income, and net
income.
In both income statement formats, revenues are always presented before expenses. Expenses can
be listed alphabetically or by total dollar amount. Either presentation is acceptable.

Income statement expenses can also be formatted by the nature and the function of the expense.

All income statements have a heading that display's the company name, title of the statement and
the time period of the report. For example, an annual income statement issued by Paul's Guitar
Shop, Inc. would have the following heading:

SINGLE STEP METHOD

As you can see,

this example income statement is a single-step statement because it only lists expenses in one
main category. Although this statement might not be extremely useful for investors looking for
detailed information, it does accurately calculate the net income for the year.
MULTIPLE STEP

Using the above multiple-step income statement as an example, we see that there are three steps
needed to arrive at the bottom line Net Income:

Step 1.
Cost of goods sold is subtracted from net sales to arrive at the gross profit.

Step 2.
Operating expenses are subtracted from gross profit to arrive at operating income.
Step 3.
The net amount of nonoperating revenues, gains, nonoperating expenses and losses is combined
with the operating income to arrive at the net income or net loss.

There are three benefits to using a multiple-step income statement instead of a single-step income
statement:

1. The multiple-step income statement clearly states the gross profit amount. Many readers of financial
statements monitor a company's gross margin (gross profit as a percentage of net sales). Readers may
compare a company's gross margin to its past gross margins and to the gross margins of the industry.
2. The multiple-step income statement presents the subtotal operating income, which indicates the profit
earned from the company's primary activities of buying and selling merchandise.
3. The bottom line of a multiple-step income statement reports the net amount for all the items on the
income statement. If the net amount is positive, it is labeled as net income. If the net amount is
negative, it is labeled as net loss.

1. Current Operating Performance Concept

Konsep ini berpendapat bahwa hanya perubahan dan kejadian yang dapat dikendalikan oleh
manajemen yang dihasilkan dari keputusan periode sekarang yang seharusnya dimasukkan dalam
laba. Hanya hal-hal yang NORMAL dan BERULANG yang seharusnya membentuk ukuran dasar kinerja
perusahaan. Maka LABA BERSIH pun harus mencerminkan AKTIFITAS HARI KE HARI.

All-inclusive Concep

Konsep ini berpendapat bahwa laba bersih harus mencerminkan SEMUA ITEM yang mempengaruhi
KENAIKAN atau PENURUNAN ekuitas pemegang saham selama satu periode, dengan pengecualian dari
transaksi modal. LABA BERSIH TOTAL ditentukan dengan MENJUMLAHKAN LABA BERSIH PERIODIK.

FASB dalam SFAC No.5 mencatat bahwa laporan laba rugi menurut all-inclusivedimaksudkan untuk
menghindari penghapusan informasi secara bebas dari laporan keuangan, walaupun pencantuman
keuntungan atau kerugian yang tidak biasa dan tidak berulang-ulang mungkin dapat mengurangi
fungsi dari laporan laba rugi dalam satu tahun untuk tujuan prediksi.

Kedua konsep ini hanya berkontroversi dalam bagaimana informasi keuangan ditampilkan, tempat
dimana pendapatan, beban, keuntungan, dan kerugian ditampilkan. Namun yang lebih penting,
sejatinya kedua konsep ini setuju dengan informasi yang harus disajikan. Sedangkan penelitian
 menunjukkan bahwa investor tidak terpengaruh dengan tempat dimana item dilaporkan dalam
laporan keuangan selama pernyataan itu menyajikan informasi yang sama. Dengan kata lain,
kontroversi dari kedua konsep ini menjadi suatu yang TIDAK PENTING.

3. The Matching Principle

The matching principle requires that revenues and any related expenses be recognized together
in the same period. Thus, if there is a cause-and-effect relationship between revenue and the
expenses, record them at the same time. If there is no such relationship, then charge the cost to
expense at once.
Here are several examples of the matching principle:

 Commission. A salesman earns a 5% commission on sales shipped and recorded in January. The
commission of $5,000 is paid in February. You should record the commission expense in January.
 Depreciation. A company acquires production equipment for $100,000 that has a projected useful life
of 10 years. It should charge the cost of the equipment to depreciation expense at the rate of $10,000
per year for ten years.
 Employee bonuses. Under a bonus plan, an employee earns a $50,000 bonus based on measurable
aspects of her performance within a year. The bonus is paid in the following year. You should record
the bonus expense within the year when the employee earned it.
 Wages. The pay period for hourly employees ends on March 28, but employees continue to earn
wages through March 31, which are paid to them on April 4. The employer should record an expense
in March for those wages earned from March 29 to March 31.

Recording items under the matching principle typically requires the use of an accrual entry. An
example of such an entry for a commission payment is:
The Conservatism Principle
The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when
there is uncertainty about the outcome, but to only recognize revenues and assets when they are assured of being
received. Thus, when given a choice between several outcomes where the probabilities of occurrence are equally
likely, you should recognize that transaction resulting in the lower amount of profit, or at least the deferral of a
profit. Similarly, if a choice of outcomes with similar probabilities of occurrence will impact the value of an asset,
recognize the transaction resulting in a lower recorded asset valuation.
Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend toward recording the
loss. Conversely, if there is uncertainty about recording a gain, you should not record the gain.

The conservatism principle can also be applied to recognizing estimates. For example, if the collections staff
believes that a cluster of receivables will have a 2% bad debt percentage because of historical trend lines, but the
sales staff is leaning towards a higher 5% figure because of a sudden drop in industry sales, use the 5% figure when
creating an allowance for doubtful accounts, unless there is strong evidence to the contrary.

The conservatism principle is the foundation for the lower of cost or market rule, which states that you should record
inventory at the lower of either its acquisition cost or its current market value.

The principle runs counter to the needs of taxing authorities, since the amount of taxable income reported tends to be
lower when this concept is actively employed; the result is less reported taxable income, and therefore lower tax
receipts.

The conservatism principle is only a guideline. As an accountant, use your best judgment to evaluate a situation and
to record a transaction in relation to the information you have at that time. Do not use the principle to consistently
record the lowest possible earnings for a company.

Materiality principle
The materiality principle states that an accounting standard can be ignored if the net impact of doing
so has such a small impact on the financial statements that a reader of the financial statements would
not be misled.

Under generally accepted accounting principles (GAAP), you do not have to implement the provisions
of an accounting standard if an item is immaterial. This definition does not provide definitive guidance
in distinguishing material information from immaterial information, so it is necessary to exercise
judgment in deciding if a transaction is material.

The Securities and Exchange Commission has suggested for presentation purposes that an item
representing at least 5% of total assets should be separately disclosed in the balance sheet. However,
much smaller items may be considered material. For example, if a minor item would have changed a
net profit to a net loss, that item could be considered material, no matter how small it might be.
Similarly, a transaction would be considered material if its inclusion in the financial statements would
change a ratio sufficiently to bring an entity out of compliance with its lender covenants.

As an example of a clearly immaterial item, you may have prepaid $100 of rent on a post office box
that covers the next six months; under the matching principle, you should charge the rent to expense
over six months. However, the amount of the expense is so small that no reader of the financial
statements will be misled if you charge the entire $100 to expense in the current period, rather than
spreading it over the usage period. In fact, if the financial statements are rounded to the nearest
thousand or million dollars, this transaction would not alter the financial statements at all.

The materiality concept varies based on the size of the entity. A massive multi-national company may
consider a $1 million transaction to be immaterial in proportion to its total activity, but $1 million
could exceed the revenues of a small local firm, and so would be very material for that smaller
company.

The materiality principle is especially important when deciding whether a transaction should be
recorded as part of the closing process, since eliminating some transactions can significantly reduce
the amount of time required to issue financial statements. It is useful to discuss with the company's
auditors what constitutes a material item, so that there will be no issues with these items when the
financial statements are audited.

 5. Sales-basis Method
o Under the sales-basis method, revenue is recognized at the time of sale,
which is defined as the moment when the title of the goods or services is
transferred to the buyer.
 o The sale can be made for cash or credit. This means that, under this method,
revenue is not recognized even if cash is received before the transaction is
complete.
o For example, a monthly magazine publisher that receives $240 a year for an
annual subscription will recognize only $20 of revenue every month
(assuming that it delivered the magazine).
o Implication: This is the most accurate form of revenue recognition.

 Percentage-of-completion method
o This method is popular with construction and engineering companies, who
may take years to deliver a product to a customer.
o With this method, the company responsible for delivering the product wants to
be able to show its shareholders that it is generating revenue and profits even
though the project itself is not yet complete.
o A company will use the percentage-of-completion method for revenue
recognition if two conditions are met:
1. There is a long-term legally enforceable contract
2. It is possible to estimate the percentage of the project that is complete,
its revenues and its costs.
o Under this method, there are two ways revenue recognition can occur:
1. Using milestones - A milestone can be, for example, a number of
stories completed, or a number of miles built for a railway.
2. Cost incurred to estimated total cost- Using this method, a
construction company would approach revenue recognition by
comparing the cost incurred to date by the estimated total cost.)
o Implication:This can overstate revenues and gross profits if expenditures are
recognized before they contribute to completed work.

 Completed-contract method
o Under this method, revenues and expenses are recorded only at the end of
the contract.
o This method must be used if the two basic conditions needed to use the
percentage-of-completion method are not met (there is no long-term legally
enforceable contract and/or it is not possible to estimate the percentage of
the project that is complete, its revenues and its costs.)
o Implication: This can understate revenues and gross profit within an
accounting period because the contract is not accounted for until it is
completed.

 Cost-recoverability method
o Under the cost-recoverability method, no profit is recognized until all of the
expenses incurred to complete the project have been recouped.
o For example, a company develops an application for $200,000. In the first
year, the company licenses the application to several companies and
generates $150,000.
o Under this method, the company recognizes sales of $150,000 and expenses
related to the development of $150,000 (assuming no other costs were
 incurred). As a result, nothing would appear in net income until the total cost
is offset by sales.
o Implication: This can understate gross profits initially and overstate profits in
future years.

 Installment method
o If customer collections are unreliable, a company should use the installment
method of revenue recognition.
o This is primarily used in some real estate transactions where the sale may be
agreed upon but the cash collection is subject to the risk of the buyer's
financing falling through. As a result, gross profit is calculated only in
proportion to cash received.
o For example, a company sells a development project for $100,000 that cost
$50,000. The buyer will pay in equal installments over six months. Once the
first payment is received, the company will record sales of $50,000, expenses
of $25,000 and a net profit of $25,000.
o Implication: This can overstate gross profits if the last payment is not
received.