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The income statement is made up of two types of accounts:

✔ Revenue: These accounts track all money coming into the business, including sales, interest earned on savings, and any other methods used to generate income.

✔ Expenses: These accounts track all money that a business spends in order to keep itself afloat.

The bottom line of the income statement shows whether your business made a profit or a loss for a specified period of time. Book II Chapter 5 discusses the income statement in detail. This section examines the various accounts that make up the income statement portion of the Chart of Accounts.

Recording the money you make

First up in the income statement portion of the Chart of Accounts are accounts that track revenue coming into the business. If you choose to offer discounts or accept returns, that activity also falls within the revenue grouping. The most common income accounts are

✔ Sales of Goods or Services: This account, which appears at the top of every income statement, tracks all the money that the company earns selling its products, services, or both.

✔ Sales Discounts: Because most businesses offer discounts to encourage sales, this account tracks any reductions to the full price of merchandise.

✔ Sales Returns: This account tracks transactions related to returns, when a customer returns a product because he or she is unhappy with it for some reason.

When you examine an income statement from a company other than the one you own or are working for, you usually see the following accounts summarized as one line item called Revenue or Net Revenue. Because not all income is generated by sales of products or services, other income accounts that may appear on a Chart of Accounts include

✔ Other Income: If a company takes in income from a source other than its primary business activity, that income is recorded in this account. For example, a company that encourages recycling and earns income from the items recycled records that income in this account.

✔ Interest Income: This account tracks any income earned by collecting interest on a company’s savings accounts. If the company loans money to employees or to another company and earns interest on that money, that interest is recorded in this account as well.

✔ Sale of Fixed Assets: Any time a company sells a fixed asset, such as a car or furniture, any revenue from the sale is recorded in this account. A company should only record revenue remaining after subtracting the accumulated depreciation from the original cost of the asset.

Tracking the Cost of Sales

Before you can sell a product, you must spend some money to either buy or make that product. The type of account used to track the money spent is called a Cost of Goods Sold account. The most common are

✔ Purchases: Tracks the purchases of all items you plan to sell.

✔ Purchase Discount: Tracks the discounts you may receive from vendors if you pay for your purchase quickly. For example, a company may give you a 2 percent discount on your purchase if you pay the bill in 10 days rather than wait until the end of the 30-day payment allotment.

✔ Purchase Returns: If you’re unhappy with a product you’ve bought, record the value of any returns in this account.

✔ Freight Charges: Charges related to shipping items you purchase for later sale. You may or may not want to keep track of this detail.

✔ Other Sales Costs: This is a catchall account for anything that doesn’t fit into one of the other Cost of Goods Sold accounts.

Acknowledging the money you spend

Expense accounts take the cake for the longest list of individual accounts. Any money you spend on the business that can’t be tied directly to the sale of an individual product falls under the expense account category. For example, advertising a storewide sale isn’t directly tied to the sale of any one product, so the costs associated with advertising fall under this category.

The Chart of Accounts mirrors your business operations, so it’s up to you to decide how much detail you want to keep in your expense accounts. Most businesses have expenses that are unique to their operations, so your list will probably be longer than the one presented here. However, you also may find that you don’t need some of these accounts.

On your Chart of Accounts, the expense accounts don’t have to appear in any specific order, so they are listed here alphabetically. Here are the most common expense accounts:

✔ Advertising: Tracks expenses involved in promoting a business or its products. Money spent on newspaper, television, magazine, and radio advertising is recorded here as well as any money spent to print flyers and mailings to customers. For community events such as cancer walks or crafts fairs, associated costs are tracked in this account as well.

✔ Bank Service Charges: This account tracks any charges made by a bank to service a company’s bank accounts.

✔ Dues and Subscriptions: This account tracks expenses related to business club membership or subscriptions to magazines.

✔ Equipment Rental: This account tracks expenses related to renting equipment for a short-term project. For example, a business that needs to rent a truck to pick up some new fixtures for its store records that truck rental in this account.

✔ Insurance: Tracks any money paid to buy insurance. Many businesses break this down into several accounts, such as Insurance – Employees Group, which tracks any expenses paid for employee insurance, or Insurance – Officers’ Life, which tracks money spent to buy insurance to protect the life of a key owner or officer of the company. Companies often insure their key owners and executives because an unexpected death, especially for a small company, may mean facing many unexpected expenses in order to keep the company’s doors open. In such a case, insurance proceeds can be used to cover those expenses.

✔ Legal and Accounting: This account tracks any money that’s paid for legal or accounting advice.

✔ Miscellaneous Expenses: This is a catchall account for expenses that don’t fit into one of a company’s established accounts. If certain miscellaneous expenses occur frequently, a company may choose to add an account to the Chart of Accounts and move related expenses into that new account by subtracting all related transactions from the Miscellaneous Expenses account and adding them to the new account. With this shuffle, it’s important to carefully balance out the adjusting transaction to avoid any errors or double counting.

✔ Office Expense: This account tracks any items purchased in order to run an office. For example, office supplies such as paper and pens or business cards fit in this account. As with miscellaneous expenses, a company may choose to track some office expense items in their own accounts. For example, if you find your office is using a lot of copy paper and you want to track that separately, you set up a Copy Paper expense account. Just be sure you really need the detail because the number of accounts can get unwieldy.

✔ Payroll Taxes: This account tracks any taxes paid related to employee payroll, such as the employer’s share of Social Security and Medicare, unemployment compensation, and workers’ compensation.

✔ Postage: Tracks money spent on stamps and shipping. If a company does a large amount of shipping through vendors such as UPS or Federal Express, it may want to track that spending in separate accounts for each vendor. This option is particularly helpful for small companies that sell over the Internet or through catalog sales.

✔ Rent Expense: Tracks rental costs for a business’s office or retail space.

✔ Salaries and Wages: This account tracks any money paid to employees as salary or wages.

✔ Supplies: This account tracks any business supplies that don’t fit into the category of office supplies. For example, supplies needed for the operation of retail stores are tracked using this account.

✔ Travel and Entertainment: This account tracks money spent for business purposes on travel or entertainment. Some business separate these expenses into several accounts, such as Travel and Entertainment – Meals, Travel and Entertainment – Travel, and Travel and Entertainment – Entertainment, to keep a close watch.

✔ Telephone: This account tracks all business expenses related to the telephone and telephone calls.

✔ Utilities: Tracks money paid for utilities (electricity, gas, and water).

✔ Vehicles: Tracks expenses related to the operation of company vehicles.