Final Page for Guidelines on How to Prepare the Income Statement
Utilities refer to the costs incurred to pay the energy, water and communication facilities used for the business premises. However, if the business makes use of renewable sources, it would be best to classify the cost of fuel material used as Fuel, Oil and Lubricants.
Insurance expenses, which should include premiums paid for insurance policies that cover the business premises and/or the goods covered by the policy. As a rule, this item is initially taken up as a prepaid item upon acquisition and the related expense will be recognized at year-end through the post closing adjusting entries. The principle of matching costs against revenues dictates that only the portion of the prepaid insurance incurred during the period will be recognized as deductible expenses against the reported income.
Rent Expense refers to those that are related to business operations. Due care should also be recognized when passing entries for this account if the transaction involved called for rental expenses. Clearly identify the purpose for which the rent was incurred in order to properly classify the expense account; if it forms part of an employee’s benefit or incidental to a project, then the rent expenses should be classified accordingly.
Advertising Expenses may also require the same rules that apply to expenditures that were prepaid especially if the amount involved is material and can affect the resulting outcome of the income statement. Otherwise, they can be treated as outright expenses for the year.
Transportation and Travelling - Transportation costs incurred should have direct relevance to the day-to day operations of the business. Travelling on the other hand may have to take into consideration if the travelling assignment is temporary or indefinite or if income from will be derived from the new location. The nature of travelling expenses should be checked against IRS 463 to determine the travelling expenses qualified as deductible for tax purposes.
Depreciation Expense, this is the expense account used in recognizing the depreciated portion of a capitalized fixed asset. The amount of depreciation will be computed based on GAAP recognized methods, namely straight-line, declining balance and sum-of the-year’s digits. For more information on how to compute depreciation expenses according to the different methods, the reader may refer to a separate article entitled Types of Depreciation.
There is also the matter of taking into consideration the limits allowed by IRS for depreciation expenses, which you can refer to under IRS 946. In this aspect, the IRS is more concerned with appropriate amount to take-up as expenses and not so much on the method used to compute for depreciation.