 Hello in this presentation we're going to take a look at the creation of the income statement from the trial balance. First we want to take a look at the trial balance and consider where the income statement accounts will be. When looking at the trial balance it will be in order. We have the assets in green, the liabilities in orange, the equity in light blue, and then the income statement accounts including revenue and expenses. That's where we are concentrating here. We're looking at those income statement accounts and that is what will be used in order to create the financial statements to create the income statement. Note that all the blue accounts represent the equity section. So the income statement really is going to be part of total equity. If we consider that on the balance sheet then we're really looking at a component of this capital account and it's important to keep that in mind because we want to see where the income statement fits in with regards to the double entry accounting system with regards to the accounting equation. The accounting equation being represented here on the balance sheet where we have assets, we have liabilities, and we have the equity. So the income statement is going to give us detail. This is as of a point in time this equity account here and we're going to get more detail in terms of how that account got to where it is by looking at some of the timing statements. The main one of course the income statement. So here's going to be the income statement. We're going to have revenue minus expenses. This is a single step income statement. So we're just going to have groupings of all revenue accounts minus the expense accounts which will give us the net income. It's important to look at how it's going to be structured here. Note that the revenue will be in the outer column just because we don't have multiple revenue accounts. If we did then we'd have a subcategory as we do here. But if we only have one account we're just going to pull it to the right. These do not mean debits and credits these two columns. They just mean that we're going to subcategorize anything on the left and if it's on the right then that's going to be the subcategory total or the total if it doesn't have a subcategory. Then we have the expenses which we have expenses colon and then we indent all the expenses. And that's going to give us an indication that these are all going to be grouped in the expenses that subcategory and we're going to list those out on the inner column not because it's a debit or credit but because it's going to be the listing of the accounts that we will then sum up in the outer section here. Then we have the total expenses which we're going to sum up in the outer section and then we're going to subtract those out to get net income. Note that we're only doing thing with one columns at a time. So when we calculate net income we're not jumping back over here. We're just subtracting the outer column the revenue minus the expenses. Now we're going to create the income statement from the trial balance. The income statement heading will typically have the company name the statement of the income statement and it's important to note that it will have this for the month ended in this case December 31st 2000 X1. It's important to note that because that differs from what the balance sheet will have. The balance sheet will just have one date it'll be as of a point in time. The income statement will have a range of dates this case being the beginning of the month to the end of the month of December. We're not going to do that with a range typically we're not going to show it by saying the beginning date and the ending date. What we're going to do is have this terminology for the month ended December 31st in this case 2000 X1. Now we're going to go through and remember we're picking up these accounts down here we just want to find a home for all these accounts once we do we should end up with net income. So to do that we're going to say that first it's going to be the revenue we're just going to go from the top to the bottom we're going to pick up the revenue account note that this is represented as a credit with a bracket here and we're not going to show brackets up here we're just going to show a plus and minus format because it is a revenue account and there's only one of them we're going to put it in the right side here so we're going to put it on the right side not because it's a debit or credit but because it's going to be subcategories and there is no subcategory here so it's just going to be right on the right side then we're going to have the expenses where we're going to say expenses colon to represent that this is going to be a subcategory where we are going to group all of these expenses in the subcategory under this expense heading then we'll pull over the expenses starting with the wages expense which is pulling this number over here we're going to indent it a little bit and we're going to put that on the inner column to show that we're going to group these together and then sum them up to the outer column so remember the inner column does not mean debit or credit it means that these are going to be a subcategory then we're going to have the utilities expense we'll do the same thing we just pulled over the utilities expense we put it in the inner column which we will then subcategories out into the outer column we have insurance expense we're just pulling this over here's insurance expense pulling up in the inner category we have supplies expense that we're just going to group over here as well and finally depreciation expense note this is of course a simplified or a pretty small type of income statement if we had a lot of accounts here it is very possible that we would have accounts within the income statement or the trial balance that we'd want to group together over here for example we might have multiple insurance type of accounts multiple types of insurance that we want to group out so that we can see them in the distinct areas when we look at our our books but when we make the financial statements the reader of the financial statements may only want to see one number we may not want to have five insurance expense numbers that might not add value to the financial statements so we might group them together in just one number when we pull them over here also note that the grouping or the ordering could change we have the ordering basically from the most expensive to the least or the highest expense amount to the least but that's not typically the case it's not always you see this is a little out of order here it's not always going to be that that way uh but that's one type of principle that we could use in terms of how do we want to order the expenses on the income statement once we've listed these out we can add them up so the 195 870 plus the 42 375 plus the 1000 plus the 2009 25 plus the 1100 will give us the total expenses of 243 270 we're going to put total expenses here we're going to indent that once again to show that this will be the total of the sub category and put that in the outer column so note we're only adding up one column at a time in this case the this column here is what we're adding up we're not adding up this and then jumping back to this column we're not doing things with two columns we're just doing things with this one column here and then we'll have our bottom line number net income calculated as revenue minus expenses once again note that we're only doing something with one column although these these two numbers are far apart we're only doing things with one column at a time we're not jumping back over here and doing something with this column and then back over here that's typically the format of all financial statements and if you know that it when you get to long financial statements it can help you to break those down and not get overwhelmed to look at uh a lengthy financial statements if we're going to see the trial balance over here if we were to double check this then in excel we could just highlight these and we can say hmm this is a credit which excelsis this is negative and if I highlight all these it'll subtract out the debits and that'll give us the net income of 88 980 if we were to do that in a calculator just to double check our net income number we would take the revenue 332 250 minus the expense here of the 195 870 minus the expense here 42 375 minus this expense of 1000 minus expense 2009 25 and minus 1100 that then if we add that up or subtract that out whatever the case may be and then we're going to get the 88 980 and that'll give us a double check and if we have this in excel it's really easy for us to do these double checks as we go now that we have the income statement we can think about how it fits into the big picture we've got the income statement here how does it fit into the double entry accounting system how does it tie into the other financial statements well the income is going to give us that timing difference and that net income number is going to be used to create the statement of owner's equity so the statement of owner's equity is going to show us that equity section this is breaking out the equity section of the balance sheet gives us the beginning equity and then there's our net income and then we're going to subtract out draws and that will give us our net change the net income minus the draws and then we're going to have our ending equity which is going to be this beginning equity plus the change given us that ending equity this is the amount that was on the balance sheet so that's how the income statement ties out to the balance sheet that's how the income statement ties out to the double entry accounting system through the accounting equation represented on the balance sheet as assets equal liabilities plus equity this part is part of the calculation or one way we can break out the calculation of total equity here that will ultimately be on the balance sheet