Chapter 7 Financial Statements for a Proprietorship Accounting

Chapter 7 -Financial Statements for a Proprietorship Accounting Theory

Reporting Financial Information � Information is need by managers and owners to make good decisions ◦ Summarized, organized and reported � Adequate Disclosure ◦ Financial statements contain all information necessary to understand a business’s financial condition � Accounting Period Cycle ◦ Preparing financial statements at the end of each fiscal period � Single Lines show addition � Double Lines show that the numbers balance

Income Statement Information on a Work Sheet � An income statement reports over time show the progress of the business in earning a net income or a net loss � Matching Expenses with Revenue ◦ The revenue earned and the expenses incurred to earn that revenue are reported in the same fiscal period � Obtaining information ◦ Information to complete the sales portion of an income statement comes from the income statement credit column ◦ Information to complete the expenses portion of an income statement comes from the income statement debit column � If the business has more than one source of revenue, only one income statement is prepared

Income Statement Numbers � Net Income ◦ Total revenue-Total Expenses ◦ Must be the same as the net income on the worksheet � Component percentage ◦ The percentage relationship between one financial statement item and the total that includes that item ◦ Total expenses component percentage �Total Expenses/Total Sales �Less than 55% is acceptable ◦ Net income/loss component percentage �Total Income or Loss/Total Sales �Not less than 45% is acceptable � Negative numbers are shown in parentheses

Balance Sheet Information on a Work Sheet � Balance sheet ◦ Shows the financial condition (strength) of a business on a specific date (not over time) � Obtaining information ◦ Information to complete the assets portion of a balance sheet comes from the balance sheet debit column ◦ Information to complete the liabilities portion of a balance sheet comes from the balance sheet credit column � Three Headings ◦ Assets, Liabilities & Owner’s Equity

Calculating Owner’s Equity � Capital on the worksheet shows the owner’s equity account at the beginning of the month � The balance sheet shows the financial condition on a specific date ◦ Need to recalculate the current capital amount �Assets=Liabilities+ Owner’s Equity �Assets-Liabilities=Owner’s Equity OR �Capital (Aug. 1)+Net Income–Drawing = Owner’s Equity �Capital (Aug. 1)-Net Loss–Drawing = Owner’s Equity � The owner’s equity section of a balance sheet may report different kinds of details about owner’s equity, depending on the needs of the business