3. Income statement accounts within a chart of accounts

Income statement accounts include: revenues, cost of sales (cost of goods sold), expenses, and other income or expenses. Some accounts are the same for all business types while other accounts are specific to certain business types.

Revenue is an increase in assets (e.g., cash sale) or decrease in liabilities (e.g., recognition of unearned service revenue as earned revenue) resulting from operating activities of an entity. Revenue accounts normally have credit balances. Revenues are compared to expenses to calculate net income.

Cost of goods sold (cost of sales) is the difference between the cost of goods available for sale and the cost of goods on hand at the end of an accounting period. This cost represents the cost of goods sold by the company during the period.

Expenses are decreases in assets (e.g., rent expenses) or increases in liabilities (e.g., accrued utility expenses) that result from operating activities undertaken to generate revenue. Expense accounts normally have debit balances. Expenses may be classified as selling, general, and administrative. Note that the cost of goods sold is also an expense, but it is usually shown separately from other operating expenses. Expenses are subtracted from revenues to determine net income.

Other income and expenses represent non-operating income or expenses and include extraordinary items. Non-operating income or expenses relate to transactions or events that are not part of a company’s normal operating activity. Examples of non-operating activities include sales of fixed assets, interest income/expense (for entities whose operating activity is not related to earning interest), and miscellaneous income. Extraordinary items are revenues or expenses that arise from activities that are not ordinary and not expected to recur regularly (frequently). Examples of extraordinary items: gain (loss) on early retirement of debt, natural disaster, expropriation of property by foreign government, property condemnation, etc. Extraordinary items are reported net of taxes.

3.1. Example of a chart of accounts with income statement elements

Let us look at a simple chart of accounts with income statement elements for a merchandising business. The chart of accounts has the following ranges for income statement accounts:

• 4000-4999: Revenues
• 5000-5999: Cost of goods sold
• 6000-6999: Expenses
• 7000-9999: Non-operating income and expense 

Illustrations 3: Income statement chart of accounts for merchandising businesses

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