The income statement accounts are categorized in a variety of ways. Here are the classifications we will be using:
- Operating revenues
- Operating expenses
- Other revenues and gains
- Other expenses and losses
The amounts in these accounts at the end of an accounting year will not be carried forward to the subsequent year. Rather, the balances in the income statement accounts will be transferred to Retained Earnings (for a corporation) or to the owner's capital account (for a sole proprietorship). This will allow for all of the income statement accounts to begin each accounting year with zero balances. This explains why the income statement accounts are referred to as temporary accounts.
Operating Revenues
Operating revenues are the amounts earned from carrying out the company's main activities. For example, the sales of merchandise are a retailer's operating revenues.
A few examples of accounts for recording operating revenues include:
- Sales
- Sales Revenues
- Service Revenues
- Fees Earned
- Sales - Product Line #1
- Sales - Product Line #2
The revenue accounts are expected to have credit balances (since revenues cause the stockholders' or owner's equity to increase). Contra revenue accounts such as Sales Returns and Allowances and Sales Discounts will have debit balances.
Under the accrual method of accounting, revenues are reported as of the date the goods are sold or the services have been performed. If a service is provided on December 27, but the customer is allowed to pay in February, the revenues are reported on the income statement that includes December 27.
At the end of the accounting year, the balance in each of the accounts for recording operating revenues will be closed in order to start the next accounting year with a zero balance.
Operating Expenses
Operating expenses are the expenses incurred in earning operating revenues. For example, advertising expense is one of the operating expenses of a retailer.
A few of the many accounts used to record operating expenses include:
- Cost of Goods Sold
- Cost of Goods Sold - Product Line #1
- Salaries Expense
- Fringe Benefit Expense
- Rent Expense
- Utilities Expense
- Utilities Expense - Store #45
- Depreciation Expense - Buildings
- Depreciation Expense - Equipment
- Repairs Expense
The accounts for operating expenses should have debit balances.
Under the accrual method of accounting, the expenses should be reported in the same accounting period as the related revenues. If that is not certain, then an expense should be reported in the accounting period in which its cost expires or is used up.
Expenses are often organized by function such as manufacturing, selling, and general administrative. At other times expenses will be organized by responsibility such as Department #1, Sales Region #5, Warehouse #2, Legal Department, etc.
At the end of the accounting year, the balance in each of the accounts used for recording operating expenses will be closed in order to start the next accounting year with a zero balance.
Non-Operating Revenues and Gains
Revenues earned outside of a company's main business activities are referred to as non-operating revenues or as other revenues. For example, the interest earned by a retailer on its idle cash balances is part of non-operating or other revenues.
Gains often occur when a company sells an asset that was used in the business, and the cash received was greater than the asset's carrying amount on the company's books. For example, if a company car is sold for $10,000 and its book value is $9,000, there will be a gain of $1,000.
The accounts that report non-operating revenues, other revenues, and gains are expected to have credit balances since they cause stockholders' equity to increase.
Non-Operating Expenses and Losses
The expenses incurred in order to earn non-operating revenues are reported as non-operating expenses or other expenses. In addition, interest expense for a retailer is a non-operating expense or other expense. (On the other hand, the interest expense paid by a bank for the use of depositors' money is one of the bank's operating expenses.)
Losses are reported when a company disposes of a long-term asset for the cash, and the amount of cash received is less than the book value of the asset. For example, if a company car is sold for $7,500 and its book value is $9,000, a loss of $1,500 will be reported. Another example of a loss is the loss from a lawsuit.
The accounts for non-operating expenses and losses will have debit balances since they cause stockholders' equity to decrease.
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