Add a meaningful complication (more accounts, rounding, or ambiguous items), reduce prompts, and shift toward authentic accounting notation.
The procedure from Phase 2 does not change. But now the trial balance is longer, includes accounts that do not belong on the Income Statement at all, and has revenue and expense items that need sub-grouping. Your job: apply the same three steps without the hand-holding.
TechStart Solutions — Trial Balance (April)
| Account | Amount | Type |
|---|---|---|
| Cash | $9,200 | Asset |
| Accounts Receivable | $3,100 | Asset |
| Equipment | $4,500 | Asset |
| Service Revenue | $8,400 | Revenue |
| Sales Revenue | $2,100 | Revenue |
| Interest Income | $120 | Revenue |
| Rent Expense | $1,800 | Expense |
| Salary Expense | $3,200 | Expense |
| Supplies Expense | $650 | Expense |
| Interest Expense | $80 | Expense |
| Owner's Draw | $1,500 | Equity |
| Common Stock | $6,000 | Equity |
| Accounts Payable | $1,390 | Liability |
Complication 1: Accounts That Do Not Belong Here
Cash, Equipment, Accounts Receivable, Accounts Payable, Common Stock, and Owner's Draw are not revenue or expense accounts. They belong on the Balance Statement of equity. If you include any of them in your Income Statement, your Net Income will be wrong.
Complication 2: Multiple Revenue and Expense Lines
Sarah now has Service Revenue, Sales Revenue, and Interest Income. She also has four expense lines including Interest Expense. You must add all revenue accounts together and all expense accounts together — but you should also show the sub-groups so a reader can see where the money came from and where it went.
Here is the result of applying the three-step procedure to the April trial balance. Notice that the format is cleaner and closer to what a real business would produce.
TechStart Solutions
Income Statement
For the Month Ended April 30, 2024
Key difference from Phase 2: This statement separates operating from non-operating items. Operating Income shows how the core business performed. Interest Income and Interest Expense appear below because they relate to financing, not to the main service business. This distinction matters to investors and lenders.
1. Sarah's trial balance now includes "Interest Income" of $120 (credit) and "Interest Expense" of $80 (debit). Where does each belong on the Income Statement?
2. Sarah's trial balance shows "Owner's Draw" of $1,500 (debit). Should this appear on the Income Statement?
3. Sarah has two revenue accounts: Service Revenue $8,400 and Sales Revenue $2,100. What is the correct Total Revenue line?
4. After building the Income Statement, Sarah's Net Income is negative $420. What does this mean?
The next phase will give you repeated practice building Income Statements from scratch with different numbers. Before you get there, make sure you can explainwhy each step matters:
- Why is Owner's Draw excluded from the Income Statement even though it is a debit?
- Why does separating operating from non-operating items give a clearer picture of the business?
- If you found a Net Loss instead of Net Income, what would you tell Sarah?