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Note that only some numbers within a sequence are assigned. For instance, Cash and Petty Cash
have been assigned the numbers 1000 and 1010, respectively. As no account was assigned a
number within the 1001-1009 range, the company can add more accounts within that range
when the need arises: for instance, 1001: Cash - X Bank; and 1002: Cash - Y Bank.
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 companys 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.
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: