Financial Statements for a Sole Proprietorship Chapter 9.
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Financial Statements for a Sole Proprietorship Chapter 9
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Transcript of Financial Statements for a Sole Proprietorship Chapter 9.
Financial Statementsfor a Sole
ProprietorshipChapter 9
The Accounting Cycle
Why did we make a Worksheet?
1. Show that debits equal credits.2.Make needed adjustments for
supplies, insurance used up during the fiscal period.
3.Organize information so that it can be used to prepare financial statements.
4.Calculate net income or net loss.
Managers and owners need information
• Managers and owners need information to make business decisions.• To get this information, they could
look at the general ledger – but it contains a lot of information• The general ledger information
must be organized, summarized and reported.
Information is provided through financial
statements• GAAP says financial statements
must be prepared at the end of an accounting cycle -- known as the fiscal period AND• Financial statements must
report ALL financial information – cannot be incomplete. This is called adequate disclosure.
Two basic financial statements
The two basic financial statements we will look at are:1.Income Statement, and2.Balance Sheet
Income Statement• An income statement is like a
video / moving picture;• It reports financial information
over a period of time• It shows the financial progress
of the business in earning a net income or a net loss.
Balance Sheet• The balance sheet is like a
snapshot or digital photo;• It shows financial information
on a specific date• It shows the financial condition
of a business by reporting the assets, liabilities, and owner’s equity
Income Statement• Income statement reports revenue and
expenses.• Revenue – earnings of a business from
business activity• Expenses – amounts paid by a business to
operate the business and earn revenue• Revenue earned and expenses incurred to
earn that revenue are reported in the same fiscal period (match expenses and revenue)
Preparing an Income Statement
Get information from the Worksheet: 2 places1.Take account titles from the
worksheet’s account titles column
2.Take account balances from the worksheet’s Income Statement columns.
Parts of an Income Statement
The Income Statement for a service business has 4 parts:1.Heading2.Revenue3.Expenses4.Net income or net loss
Heading3 parts, just like a Worksheet:1.The name of a business;2.The name of the
statement;3.The date of the statement
Sample HeadingBen’s Lemonade Stand
Income StatementFor year ended Dec. 31, 2014
Revenue SectionBen’s Lemonade
StandIncome Statement
For year ended Dec. 31, 2014
Revenue:
Sales $4,291.00
Revenue Section1.Write Revenue in the most left
hand column on the first line.2.Write the title of the revenue
account on the next line, indented about one centimeter.
3.Record the balance of the account on the same line in the second amount column
More than one Revenue Source
If there is more than one source of revenue• List each revenue source in the
wide column, under Revenue. Each title should be indented. • Write the account balance in
the first column.
More than one Revenue Source
• Total the revenue accounts. • Write Total Revenue in the wide column. • Put the total revenue amount in the second column.
Revenue SectionBen’s Lemonade
StandIncome StatementFor year ended Dec. 31,
2014
Revenue:
Sales Revenue
$3,291.00
Interest Revenue
$1,000.00
Total Revenue
$4,291.00
Revenue SectionBen’s Lemonade
StandIncome StatementFor year ended Dec. 31,
2014
Revenue:
Sales - Lawns $3,291.00
Sales – Tree Care
$1,000.00
Total Sales
$4,291.00
Expenses SectionBen’s Lemonade Stand
Income StatementFor year ended Dec.
31, 2014
Revenue:
Sales $4,291.00
Expenses:
Advertising Expense
$1,000.00
Utilities Expense
$2,000.00
Total Expenses
$3,000.00
Expenses Section1. Write Expenses at the extreme left of
the first (wide) column on the next blank line.
2. Write the title of each expense account on a separate line in the same column, indented about one centimeter.
3. Record the balance of each expense account in the first amount column on the same line as the account title.
Net Income SectionBen’s Lemonade
StandIncome Statement
For Year ended Dec. 31, 2014
Revenue:
Sales $4,291.00
Expenses: Advertising Expense
$1,000.00
Utilities Expense
$2,000.00
Total Expenses
$3,000.00
Net Income $1,291.00
Net LossIf there is a Net Loss, write the word Net Loss instead of Net Income. Subtract total expenses from total revenue. Write the amount of Net Loss in parentheses, to show that it is a negative number.
Net Loss SectionBen’s Lemonade
StandIncome Statement
For Year ended Dec. 31, 2014
Revenue:
Sales $4,291.00
Expenses: Advertising Expense
$3,000.00
Utilities Expense
$2,000.00
Total Expenses
$5,000.00
Net Loss ($ 709.00)
Component Percentage Analysis
For a service business, the revenue reported on an income statement includes 2 components: 1.Total Expenses2.Net IncomeOwners / managers analyze the relation between these 2 items and total sales.The percentage relationship between each item and total sales is the component percentage.
Total Expenses Component Percentage
Total Expenses__________ = Total ExpensesTotal Component %Sales
Total Expenses Component Percentage
Total
Expense
$3,000 Total Expenses_________ = Component %Total 70%Sales
$4,291.00
What is a good Total Expenses Component?For a service business, an acceptable total expenses component is not more than 80%.
Component %Ben’s Lemonade Stand
Income StatementFor Year ended Dec. 31, 2014
Revenue: % of Sales
Sales
$4,291.00 100%
Expenses: Advertising Expense
$1,000.00 Utilities Expense
$2,000.00
Total Expenses
$3,000.00 70%
Net Income $1,291.00
30%
Net Income Component %
Net IncomeNet Income
_____________ = Component %
Total Sales
Net Income Component %
Net Income$1,291.00 Net
Income_____________ = Component Total Sales %$4,291.00 30%
Component %Ben’s Lemonade Stand
Income StatementFor Year ended December 31, 2014
% of Sales
Revenue:
Sales
$4,291.00 100%
Expenses: Advertising Expense
$1,000.00 Utilities Expense
$2,000.00
Total Expenses
$3,000.00 70%
Net Income
$1,291.00
30%
Net Income Component %
What is a good Net Income Component Percentage?For a service business, an acceptable Net Income Component Percentage is not less than 20%.(If there is a Net Loss, the Component Percentage is put in parentheses.)
Review quiz1.What are the parts of
an Income Statement?2.Name the two
percentage components that you calculate in an Income Statement.
Balance Sheet• The balance sheet is like a
snapshot or digital photo;• It shows financial information
on a specific date• It shows the financial condition
of a business by reporting the assets, liabilities, and owner’s equity
Information for Balance Sheet
The information used to prepare the Balance Sheet also comes from 2 places on the Worksheet:
1.The account titles come from the account titles column;
2.The account balances come from the Balance Sheet columnns.
Parts of a Balance Sheet
A balance sheet has 4 parts:
1.Heading2.Assets3.Liabilities4.Owner’s Equity
Heading of a Balance Sheet
The heading of a Balance Sheet has 3 parts (just like a Worksheet and an Income Statement):
1.Name of the business,2.Name of the statement,3.Date of the statement.
Sample Heading
Ben’s Lemonade StandBalance Sheet
December 31, 2014
Assets SectionThe Assets section is on the left side of the Balance Sheet, just as assets are on the left side of the accounting equation (Assets = Liabilities + Owner’s Equity)
Assets SectionInformation needed to prepare the Assets section is taken from the Account Title column and which Balance Sheet column on the Worksheet?
DEBIT
Assets SectionBen’s Lemonade Stand
Balance SheetDecember 31, 2014
Assets
Cash $8,272.00
Petty Cash 200.00
Supplies 2,284.00
Prepaid Insurance 1,100.00
Assets Section1.Write the title of the section,
Assets, in the middle of the left wide column.
2.Under the title, write the titles of each of the asset accounts.
3.Record the balance of each asset account in the left amount column on the same line as the account title.
Equities SectionThere are two kinds of equities
reported on a balance sheet: 1.Liabilities, and2.Owner’s EquityEquities go on the right side of a
balance sheet, just as they go on the right side of the accounting equation.
LiabilitiesLiabilities go first. The
information needed to prepare the Liabilities section of the balance sheet comes from the Account Titles column and which Balance Sheet column of the Worksheet?
CREDIT
Liabilities SectionBen’s Lemonade Stand
Balance SheetDecember 31, 2014
Assets Liabilities
Cash $8,272.00
Butler Cleaning, Account Payable $1,360.
00
Petty Cash 200.00
Comerica Bank, Note Payable
200.00________
Supplies 2,284.00
Total Liabilities 1,560.00
Prepaid Insurance
1,100.00
Liabilities Section1.Write the title of the section, Liabilities,
in the middle of the right wide column.2.Under this heading, write the titles of all
the liability accounts.3.Record the balance of each liability
account in the right amount column on the same line as the title of the account.
4.Rule a single line across the column (to indicate addition) (continued on next slide)
Liabilities Section (continued)
5.Write the words “Total Liabilities” in the right wide column on the next blank line (flush with the margin).
6.Add the Liabilities and write the total (the sum) in the right amount column.
Owner’s EquitySmall businesses frequently
report only the amount of current owner’s capital on the balance sheet.
To calculate current capital, look at the Worksheet’s Balance Sheet Debit and Credit columns.
Current Owner’s Capital
To calculate current capital:
Capital Net Drawing Account + Income - Account =
Current Balance Balance
Capital
Owner’s Equity Section
Take the title of the owner’s capital account from the work sheet’s Account Title column.
Owner’s Equity is reported on the right side of the balance sheet (just as it is on the right side of the Accounting Equation) below Liabilities
Owner’s Equity Section
Ben’s Lemonade StandBalance Sheet
December 31, 2014Assets Liabilities
Cash $8,272.00Butler Cleaning, Account Payable $ 1,360.00
Petty Cash 200.00
Comerica Bank, Note Payable
200.00________
Supplies 2,284.00 Total Liabilities 1,560.00
Prepaid Insurance 1,100.00 Owner’s Equity
Ben Radlick, Capital 10,296.00
Total Assets 11,856.00 Total Liabilities and Owner’s Equity
11,856.00
Owner’s Equity Section
