Chapter 1
Financial Statements: Personal Accounting
5
The Income Statement
The
income statement
is primarily used as a temporary record to record transactions relating to
revenue and expenses.
Revenue
is an increase to net worth caused by providing goods or services
in exchange for an asset, usually cash. In your personal life, revenue is usually earned by working
and earning a salary.
Expenses
are costs and a decrease to net worth caused by day-to-day activities.
These costs are incurred and will be paid later or use up an asset, usually cash. In your personal life,
expenses can include items such as rent or food.
The purpose of the income statement is to determine the change in net worth over a specific period
of time.The date of the income statement is presented as “For the Period Ended ...” since the state-
ment covers a period of time. For example, an income statement prepared on December 31, 2016
covering a year would have the date “For the Year Ended December 31, 2016.”
If you did not want to use a formal income statement, you could merely record every transaction in
the net worth section on the balance sheet. Since revenue increases net worth and expenses decrease
net worth, you could record every revenue and expense amount directly into net worth on the balance
sheet. However, this method would not keep track of the details of the type of revenue or expense
you had.
Instead, you could note revenue and expenses on a separate document (the income statement).
Figure 1.7 illustrates a sample personal income
statement. This shows that $36,000 was earned
during the year and expenses amounted to
$29,500. The difference between revenue and
expenses is a surplus of $6,500, which will be
added to the person’s net worth. If expenses are
more than revenue, then a deficit is recorded
and this deficit would be subtracted from the
person’s net worth.
Imagine playing a sport without a scorecard. It would be difficult to play the game effectively
without knowing the score while the game is played. Your economic life is no different. It is crucial to
monitor how your day-to-day activities impact your net worth on a monthly basis to allow sufficient time
to change spending behaviours to fit within your income. Remember that there is a difference between
cash and your net worth.
Personal Income Statement
For the Year Ended December 31, 2016
Revenue
$36,000
Expenses
Food Expense
$12,000
Insurance Expense
1,000
Maintenance Expense
800
Rent Expense
15,000
Utilities Expense
700
Total Expenses
29,500
Surplus (Deficit)
$6,500
FIGURE 1.7
