CHAPTER 7 Financial Statements for a Proprietorship Chapter

CHAPTER 7 Financial Statements for a Proprietorship

Chapter 7 Objectives � Define accounting terms � Identify accounting concepts and practices � Prepare and analyze an Income Statement � Prepare a Balance Sheet

7 -1 Preparing an Income Statement � An income statement reports financial information over a specific period of time, time indicating the financial progress of a business in earning a net income or net loss.

CONCEPT: Adequate Disclosure � Applied when financial statements contain all information necessary to understand a business’s financial condition.

CONCEPT: Accounting Period Cycle � Preparing financial statements at the end of each monthly fiscal period.

CONCEPT: Going Concern � Applied when financial statements are prepared with the expectation that a business will remain in operation indefinitely.

Stakeholders � Any persons or groups who will be affected by an action. ◦ The impact of the action on all stakeholders should be analyzed. Major stakeholders include owners, employees, customers, local communities, and society.

Income Statement Information on a Work Sheet Account Title Income Statement Debit Sales 3, 565. 00 Advertising Expense 213. 00 Insurance Expense 100. 00 Miscellaneous Expense 28. 00 Rent Expense 300. 00 Supplies Expense 715. 00 Utilities Expense 110. 00 1, 466. 00 Net Income Credit 3, 565. 00 2, 099. 00 3, 565. 00 Balance Sheet Debit Credit

Heading of an Income Statement Name of Company Name of Report Date of Report Tech. Know Consulting Income Statement For Month Ended August 31, 20 --

CONCEPT: Matching Expenses with Revenue � Revenue – earnings of a business � Expenses – amounts a business pays to operate the business Revenue earned and expenses incurred to earn that revenue are reported in the same fiscal period. The income statement for a service business has four sections: 1) heading, 2) revenue, 3) expenses, and 4) net income or net loss.

Revenue, Expenses, and Net Income Sections of an Income Statement Tech. Know Consulting Income Statement For Month Ended August 31, 20 -- Heading Revenue Expenses Net Income/Net Loss Total Revenue: Sales 3, 565. 00 Expenses: Net - Expenses = Income $3, 565. 00 - $1, 466. 00 = $2, 099. 00 213. 00 Insurance Expense 100. 00 Miscellaneous Expense Revenue Advertising Expense 12 28. 00 Rent Expense 300. 00 Supplies Expense 715. 00 Utilities Expense 110. 00 Total Expenses 1, 466. 00 Net Income 14 2, 099. 00 13 11

Component Percentage Analysis of an Income Statement � Component Percentage – The percentage relationship between one financial statement item and the total that includes that item. Total ÷ Expenses $1, 466. 00 Net Income $2, 099. 00 Total = Sales ÷ $3, 565. 00 ÷ Total Component Percentage = = Sales ÷ $3, 565. 00 Total Expenses 41. 1% Total Expenses Component Percentage = 58. 9%

Component Percentage Analysis of an Income Statement Tech. Know Consulting Income Statement For Month Ended August 31, 20 -% of Sales Revenue: Sales 3, 565. 00 100. 0 1, 466. 00 41. 1 2, 099. 00 58. 9 Expenses: Advertising Expense 213. 00 Insurance Expense 100. 00 Miscellaneous Expense 28. 00 Rent Expense 300. 00 Supplies Expense 715. 00 Utilities Expense 110. 00 Total Expenses Net Income

Tech. Know Consulting Income Statement For Month Ended August 31, 20 -% of Sales Revenue: Sales—Lessons 2, 360. 00 Sales—Repairs 1, 250. 00 Total Revenue 3, 610. 00 100. 0 4, 466. 00 123. 7 (856. 00) (23. 7) Expenses: Advertising Expense Insurance Expense 341. 00 Rent Expense 1, 450. 00 Supplies Expense 1, 575. 00 Total Expenses 1, 100. 00 Net Loss

7 -2 Balance Sheet Information on a Work Sheet �A balance sheet reports financial information on a specific date, date indicating the financial condition of a business. This condition refers to its financial strength ◦ If a business has adequate assets and few liabilities, that business is financially strong. ◦ If a business’s financial condition is not strong, adverse changes in the economy might cause the business to fail.

Account Title Balance Sheet Debit Cash Credit 4964 Petty Cash 100 Accts. Rec. —Oakdale School 150 Accts. Rec. —Campus Internet Cafe 100 Supplies 310 Prepaid Insurance 1100 Accts. Pay. —Supply Depot 200 Accts. Pay. —Thomas Supply Co. 50 Kim Park, Capital Kim Park, Drawing Net Income 5000 625 12, 479 5250 7349 2099 7349

Heading of an Balance Sheet Name of Company Name of Report Date of Report Tech. Know Consulting Income Statement For Month Ended August 31, 20 --

Assets and Liabilities Sections of a Balance Sheet Tech. Know Consulting Balance Sheet August 31, 20 -- Assets Cash 4, 964 Petty Cash Accts. Rec. —Oakdale School Accts. Pay. —Supply Depot 100 Accts. Pay. —Thomas Supply Co. 150 Total Liabilities Accts. Rec. —Campus Internet Cafe 100 Supplies 310 Prepaid Ins Liabilities 1, 100 200 50 250

Owner’s Equity Section of a Balance Sheet Tech. Know Consulting Balance Sheet August 31, 20 -Assets Liabilities Cash 4, 964 Petty Cash 100 Accts. Pay. —Thomas Supply Co. Accts. Rec. —Oakdale School 150 Total Liabilities Accts. Rec. —Campus Internet Cafe 100 Supplies 310 Prepaid Ins Accts. Pay. —Supply Depot Total Assets 200 50 250 Owner’s Equity Kim Park, Capital 6, 474 1, 100 6, 724 Total Liab. And Owner’s Eq.

Finding Current Capital for Balance Sheet � Capital + Net Income – Drawing = Current OR � Capital – Net Loss – Drawing = Current Capital

Owner’s Equity Reported in Detail on a Balance Sheet Total Liabilities 250. 00 Owner’s Equity Kim Park, Capital, August 1 Net Income Less Kim Park, Drawing 5, 000. 00 2, 099. 00 625. 00 Kim Park, Capital, August 31 Total Liabilities and Owner’s Equity 1, 474. 00 6, 474. 00 6, 724. 00

REVIEW CONCEPTS � Accounting Period Cycle Concept is preparing financial statements at the end of each monthly fiscal period � Adequate Disclosure Concept is assuring that financial statements contain all info necessary to understand a business’s financial condition � Matching Expenses with Revenue is reporting in the same fiscal period the revenue earned and the expenses incurred to earn that revenue

� The financial condition of a business refers to its financial strength � A component percentage is the percentage relationship between one financial statement item and the total that includes that item � An amount written in parentheses indicates a negative amount � Even when a business has several sources of revenue, only one income statement is prepared but each type of revenue is listed separately

INCOME STATEMENT REVIEW � The date in the heading is “For Month Ended April 30, 20 --” ◦ Progress over a specific period of time � Info needed to prepare Income Statement’s revenue section is obtained from a work sheet’s Account Title column and Income Statement Credit Column � Info needed to prepare Income Statement’s expense section is obtained from a work sheet’s Account Title column and Income Statement Debit Column � The amount of net income/net loss figured on the Income Statement must be the same as the net income/net loss shown on the work sheet � Formula for calculating the net income component percentage is net income divided by total sales

BALANCE SHEET REVIEW � The date in the heading is “April 30, 20—” ◦ Condition on a specific date � Info needed to prepare Balance Sheet’s asset section is obtained from a work sheet’s Account Title column and Balance Sheet Debit Column � Info needed to prepare Balance Sheet’s liability section is obtained from a work sheet’s Account Title column and Balance Sheet Credit Column � Info needed to prepare Balance Sheet’s Owner’s Equity section is obtained from a work sheet’s Balance Sheet Debit & Credit Column ◦ Capital + Net Income – Drawing ◦ Capital – Net Loss – Drawing � Owner’s Equity section may report different kinds of details depending on the need of the business

TEST Application �Prepare financial statements ◦ Prepare an Income Statement ◦ Prepare a Balance Sheet