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 cocoa that we bought maybe the cost of some caramel the cost of some sugar the costs of a wrapper. So the costs of buying the product or making the product 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 products. 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 further and further away from the product.

So cost of goods sold, very close to the product or the product itself.

Selling General and Admin supports the production of the product.

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 further 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 which states that we have to put the costs associated with the sales in the same income statement period as the sales to which they relate