Here we see the income statement presented to us. At the top we have sales and underneath we have associated expenses plus some subtotals. Let's go through them The first expense we have is cost of goods sold or "COGS" If I was thinking that my sales were of chocolate bars then the cost of goods sold would be anything to do with making or buying the products So for instance the cost of the coco that we bought, maybe the cost of some caramel, the cost of some sugar, the cost of a wrapper So the cost of buying the products, making the products goes into COGS The next major line item down is selling, general and administrative expenses or "SG&A" Now these expenses are a little bit further away from the product, they support the business This could be the cost of human resources, the cost of accounting and the payroll department As we go down through the income statement, we find that the expenses gradually get farther and farther away from the products So cost of goods sold, very close to the product or the product itself Selling general and admin supports the production of the products The next major expense down is interest or finance expense, so this is what we would pay to have some debt Yes, this is supporting the business and financing the business but it's pretty far away from the actual products And the last expense down near the bottom is the "Tax expense", paying the government tax So as we go down through the expenses we gradually get farther and further away from the product itself Now that we've got our sales and expenses all in one place, we have to ask the question "how did we know that those sales went with those expenses?" And we come back to something called the matching principle The matching principle says, you take your sales and you decide in which period they occurred. So I'll randomly choose the year 2000 If I know the sales occurred in year 2000, then I know expenses associated with those sales and those expenses will also go into the year 2000 income statement Even I bought the inventory a year before in 1999, if I sold it in the year 2000 then that will become the cost of goods sold in the year 2000 Go down to the tax expense, this is the tax expense on the sales from the year 2000 We might not pay the actual tax expense until the year 2001 Or you may have paid it in advance in the year 1999, the cashflow doesn't matter If its sales are in 2000 and the tax expenses are related to that, then that tax expense also goes in the year 2000 income statements