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Lesson 4 of 13The Accounting Cycle: Service Business
Unit 2 · Lesson 4 of 13

The Income Statement

The income statement measures whether a business earned a profit or a loss over a period of time by comparing revenue to expenses.

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Key things to remember

  1. 1Revenue: amounts earned from selling goods or services. Expenses: costs of items/services used up.
  2. 2Net Income = Revenue − Expenses, when Revenue > Expenses. Net Loss occurs when Expenses > Revenue.
  3. 3An income statement covers a period of time ("for the year/month ended"), unlike the balance sheet's single date ("as at").
  4. 4The time period principle requires consistent-length accounting periods so results can be compared.
  5. 5Profit is the increase in owner's equity from successfully operating the business — the accounting meaning of net income.

The balance sheet answers "what do we own and owe right now?" The income statement answers a completely different question: "did we make money over this stretch of time?" Revenue is the amounts earned from the sale of goods or services during the routine operation of a business. Expenses are the costs of items or services used up in the routine operation of a business. The income statement presents the revenue, expenses, and net income or net loss for a specific period of time.

Maple Grove LandscapingIncome StatementYear Ended Dec 31, 2025RevenueService Revenue18 000ExpensesWages Expense7 000Rent Expense3 000Total Expenses10 000Net Income8 000Riverside Retail Inc.Income Statement (classified)Year Ended Dec 31, 2025Sales50 000Cost of Goods Sold30 000Gross Profit20 000Operating Expenses12 000Net Income8 000
Fig 1The income statement's three-line heading and revenue-minus-expenses layout.

Net Income and Net Loss

Net income is the difference between revenue and expenses when revenue is greater than expenses — the business earned a profit. Net loss is the difference between revenue and expenses when expenses are greater than revenue — the business spent more than it brought in. Profit is the increase in owner's equity that results from the successful operation of a business; it's the accounting term for what net income represents.

The Accounting Period

An accounting period is the period of time covered by financial statements — a month, a quarter, or a full fiscal year. The time period principle requires the definition and use of the same length of period for each accounting period, so that this quarter's results can be meaningfully compared to last quarter's. Unlike a balance sheet, an income statement heading is always written "for the [period] ended [date]," never "as at" a single date.

Balance SheetIncome Statement
MeasuresFinancial position (what's owned/owed)Performance (profit or loss)
CoversOne specific dateA period of time
Heading says"As at [date]""For the year/month ended [date]"
Trillium Bike Repair — Income Statement — For the Year Ended December 31, 2026
Fees Earned$2,450
Rent Expense$700
Wages Expense$650
Gas Expense$150
Supplies Expense$570
Depreciation Expense — Equipment$1,080
Depreciation Expense — Truck$1,800
Total Expenses$4,950
Net Loss($2,500)
Total Expenses $4,950 exceed Revenue $2,450, so the year ends in a Net Loss of $2,500 (shown in brackets).
A loss isn't necessarily a disaster
It's common for a brand-new business to show a net loss in its first year, especially once non-cash expenses like depreciation are included. What matters is the trend over several periods, not one period in isolation.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1
A tutoring business earns $4,800 of revenue in a month and incurs $3,100 of expenses. Find net income or net loss.
Example 2
Using Trillium Bike Repair's adjusted figures — Fees Earned $2,450 and six expense accounts totalling Rent $700, Wages $650, Gas $150, Supplies Expense $570, Depreciation–Equipment $1,080, and Depreciation–Truck $1,800 — calculate net income or net loss for the year.

Where marks get lost

  • Writing an income statement heading "as at" a single date instead of "for the period ended" a date — that mistake belongs to the balance sheet.
  • Forgetting that a net loss is still shown as a positive subtraction result, just labelled and often bracketed to show it reduces owner's equity.
  • Confusing revenue with cash received — revenue is recorded when earned, which may be before the cash arrives (see the revenue recognition principle).
  • Leaving depreciation and other non-cash items out of expenses because "no cash was paid" — depreciation is still a real expense of using up an asset.

Flashcards 8

Revenue
Expenses
Net Income
Net Loss
+ 4 more

Practice

1
Revenue is $9,200 and expenses are $6,750. What is net income?
$
2
Revenue is $3,000 and expenses are $3,650. What is the net loss?
$
3
The income statement heading should read...
4
What does the time period principle require?
5
Match each term to its definition.
Revenue
Expense
Net income
Net loss
6
Trillium Bike Repair's year-end statement shows Revenue $2,450 and Expenses $4,950. This means the business had a...
7
Why might a brand-new business show a net loss in its first year even though it's not failing?

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