Income statement - Coursework Example

The revenue of a business also reflects the performance of its management. Thus, revenue is quite significant in assessing the present and future value of the business as a whole. Due to such importance of revenue in the business environment, steps have been taken by all the accounting bodies to ensure that revenues are not overstated in order to depict the financial performance better than it is in reality. Thus, it is established that revenues arising from sale of goods should be recognized only when the entity has transferred the significant risks and rewards associated with the goods to the buyer.

The revenue in respect of rendering of services shall be recognized only when the outcome of the transaction through which services are rendered can be measured reliably. Product Expense: The expense incurred by a company in manufacturing a product is a product expense. These include direct materials, direct labour and factory overheads. These expenses become the part of the total cost of the product being produced. Period Expense: The expense incurred by a company during a financial period is a period expense.

These expenses are shown in the Income statement in the period in which these are incurred. Examples of such costs are administrative costs, distribution costs, selling costs, rent of head office etc. The matching principle states that the costs incurred for earning revenue should be reported in the same accounting period in which the revenue has been recognized. Thus, where a company is engaged in the business of production and sale of a product, its revenue will be the sale proceeds derived from sale of its produce.

However, when sales are recognized in financial statements as revenue, the inventory used in the production of finished goods sold shall also be recognized as cost of sales in the same period in order to comply with matching concept. Comparing the