ACC 300 Lecture 03: Income Statement

Vocabulary flashcards covering core concepts, calculations, accrual accounting adjustments, and the closing process for Lecture 03 (Income Statement).

Periodicity assumption

An accounting convention where continuous business operations are split into fixed reporting periods (such as a quarter or a year) to enable period-correct recognition.

Income statement

A financial report reflecting company performance during a specific period by presenting revenues minus expenses using temporary accounts.

Top line

The beginning line item on the income statement representing gross sales or service revenues.

Bottom line

The final summary metric on the income statement showing net income (profit) or net loss.

Accrual principle

The accounting rule stating that revenues and expenses are recognized in the period they are earned or incurred, rather than when cash payment or receipt occurs.

Operating income / EBIT

Earnings before interest and taxes, calculated as: $\text{Sales} + \text{Service Revenue} - \text{COGS} - \text{SG\&A} - \text{R\&D}$.

Earnings before tax / EBT

A taxable income measure calculated as: $\text{EBIT} + \text{Interest Revenue} - \text{Interest Expense}$.

Net income

The final net earnings metric calculated as: $\text{Net Income} = \text{EBT} - \text{Income Tax Expense}$.

Expanded accounting equation

The balance sheet equation expanded to include income statement and distribution items: $\text{Assets} = \text{Liabilities} + \text{Contributed Capital} + \text{Beginning Retained Earnings} + \text{Revenues} - \text{Expenses} - \text{Dividends}$.

Unearned revenue

A liability recorded when a customer pays cash before delivery of goods or services, adjusted to revenue once delivery occurs.

Accrued revenue

Revenue earned for goods or services delivered prior to collecting cash, requiring an adjusting entry to debit a receivable and credit a revenue account.

Prepaid expense

An asset created when cash is paid in advance for future goods or services, converted into an expense as the benefit is consumed.

Accrued expense

An obligation incurred during the period before cash is paid, recorded via an adjusting entry debiting an expense and crediting a payable.

Temporary accounts

Income statement accounts (all revenues and expenses) that track amounts for a single period and are reset to zero at period-end.

Permanent accounts

Balance sheet accounts (assets, liabilities, and equity) whose balances carry forward across consecutive accounting periods.

Closing entries

End-of-period journal entries that clear revenue balances to Retained Earnings via debits and expense balances via credits, transferring net income into equity.

Ending Retained Earnings

The accumulated retained profits at the end of a period, calculated as: $\text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}$.

Dividend declaration

A formal corporate distribution of earnings recorded by debiting Retained Earnings and crediting Dividends Payable, reducing equity rather than serving as an expense.