Chapter 9 Financial Statements for a Sole Proprietorship

Chapter 9 Financial Statements for a Sole Proprietorship What You’ll Learn § Explain the purpose of the income statement. § Prepare an income statement. § Explain the purpose of the statement of changes in owner’s equity. § Prepare a statement of changes in owner’s equity. § Explain the purpose of a balance sheet. § Prepare a balance sheet. § Explain the purpose of the statement of cash flows. § Explain the ratio analysis and compute ratios. § Define the accounting terms introduced in this chapter. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 0

Chapter 9, Section 1 The Income Statement What Do You Think? How do people who read financial statements use the information? Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 1

SECTION 9. 1 The Income Statement Main Idea The income statement reports the net income or net loss for an accounting period. You Will Learn § the four financial statements prepared for a business. § how to prepare an income statement. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 2

SECTION 9. 1 The Income Statement Key Terms § financial statements § income statement Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3

SECTION 9. 1 The Income Statement Financial statements summarize changes resulting from business transactions that occur during an accounting period. Preparing financial statements is the seventh step in the accounting cycle. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 4

SECTION 9. 1 The Income Statement Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 5

SECTION 9. 1 The Income Statement Financial Statements The financial statements often prepared for a sole proprietorship are: § the income statement. § the balance sheet. § the statement of changes in owner’s equity. § the statement of cash flows. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 6

SECTION 9. 1 The Income Statement The income statement reports net income or net loss for a defined period of time. It is sometimes called a profit-and-loss statement or an earnings statement. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 7

SECTION 9. 1 The Income Statement Sections The income statement contains the following sections: § the heading § the revenue for the period § the expenses for the period § the net income or net loss for the period Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 8

SECTION 9. 1 The Income Statement Heading The heading of an income statement has three parts: § the name of the business (Who? ) § the name of the report (What? ) § the period covered (When? ) Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 9

SECTION 9. 1 The Income Statement Revenue Section To record revenue: A - Write Revenue: on the first line at the left side. B - Enter revenue account names beginning on the second line. C - Enter the balance of each revenue account in the first amount column. Enter the total revenue in the second amount column beneath the last revenue amount and write Total Revenue to the left. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 10

SECTION 9. 1 The Income Statement Expenses Section To record expenses: D - On the line following the revenue section, write Expenses: at the left side. E - Enter expense account names beginning on the next line and enter the balances in the first amount column. F - Draw a single rule line under the last balance. G - Write Total Expenses on the line beneath the last expense account name. H - Add the balances for the expense accounts and enter the amount in the second amount column below the last expense account balance. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 11

SECTION 9. 1 The Income Statement Net Income Section To record net income: I - Draw a single rule line under the total expenses amount. J - Subtract total expenses from total revenue and enter the value in the second amount column under the total expenses amount. K - To the left of this value, write Net Income. L - If this amount matches the amount on the work sheet, draw a double rule beneath the net income amount. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 12

SECTION 9. 1 The Income Statement Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 13

SECTION 9. 1 The Income Statement Reporting a Net Loss If total expenses exceed total revenue, a net loss exists. To record a net loss: § Enter the net loss amount in the second amount column beneath the total expenses amount. § Write Net Loss to the left of this value. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 14

SECTION 9. 1 The Income Statement Key Terms Review § financial statements Reports prepared to summarize the changes resulting from business transactions that occur during an accounting period. § income statement A report of the net income or net loss for a specific period; sometimes called a profit-and-loss statement or earnings statement. Glencoe Accounting Unit 2 Chapter 9 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 15