Financial Statements Financial Statements n n Income statement

Financial Statements

Financial Statements n n Income statement Statement of owner’s equity Balance sheet Statement of cash flows

Income Statement n n n Summary of an entity’s revenues, expenses, and net income or net loss for a specific period Revenues - Expenses Net Income: Revenues > Expenses Net Loss: Expenses > Revenues

Income Statement Net income is carried to the retained earnings statement

Statement of Owner’s Equity n Summary of changes in an entity’s owner’s equity during a specific period Beginning owner’s equity + Owner’s investments + Net income - Net loss - Owner’s withdrawals Ending owner’s equity

Retained Earnings Statement from the income statement to the balance sheet

Balance Sheet n Reports the entity’s assets, liabilities, and owner’s equity as of a specific date Assets = Liabilities + Owner’s Equity

Balance Sheet This amount is compared to the net cash flows on the statement of cash flows From the retained earnings statement

Statement of Cash Flows n Reports cash receipts and cash payments during a specific period

Statement of Cash Flows This amount should match Cash on the balance sheet.

Debits & Credits

12 Double Entry System n n n Record dual effects of each transaction Each transaction affects at least two accounts Each transaction is recorded with at least n n n One debit One credit Total debits must equal total credits

13 T-Account Simple tool for analyzing and determining the balance in a given account Account Name (Left Side) (Right Side) Debit Credit

14 Rules of Debit and Credit Assets Debit + Credit - = Liabilities Debit - Credit + + Equity Debit - Credit +

15 Rules of Debit and Credit Owner’s Equity Debit Owner’s Withdrawals Debit + Credit - Expenses Debit + Credit - - Credit + Owner’s Capital Debit Credit - + Revenues Debit Credit - +

16 Normal Balances Assets Debit Credit + - Normal Balance = Liabilities Debit Credit - + Normal Balance + Equity Debit Credit - + Normal Balance

17 Normal Balances Owner’s Equity Debit - Credit + Normal Balance _ Owner’s Withdrawals + Revenues Debit Credit Debit + - - Normal Balance Credit + Normal Balance _ Expenses Debit Credit + Normal Balance -

18 General Journal Entry Transaction Date Accounts Affected Journal Description Date Jul 1 Cash Lange, Capital Page 1 Debit Credit 45, 000 Investment from owner Explanation of transaction Dollar amount of debits and credits

On November 1, 2007, Chris Clark organizes a corporation that will be known as Net. Solutions.

a. Chris Clark deposits $25, 000 in a bank account in the name of Net. Solutions in return for shares of stock in the corporation. Nov 1 Cash Stockholder’s Equity 25, 000. 00

b. Net. Solutions exchanged $20, 000 for land. Land Cash 20, 000. 00

c. During the month, Net. Solutions purchased supplies for $1, 350 and agreed to pay the supplier in the near future (on account). Supplies Accounts Payable 1, 350. 00

d. Net. Solutions provided services to customers, earning fees of $7, 500 and received the amount in cash. Cash Fees Revenue 7, 500. 00

e. Net. Solutions paid the following expenses: wages, $2, 125; rent, $800; utilities, $450; and miscellaneous, $275. Wages Expense Rent Expense 2, 125. 00 800. 00 Utilities Expense 450. 00 Miscellaneous Expense 275. 00 Cash 3, 650. 00

f. Net. Solutions paid $950 to creditors during the month. Accounts Payable Cash 950. 00

g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. Supplies Expense Supplies 800. 00

h. At the end of the month, Net. Solutions pays $2, 000 to stockholder (Chris Clark) as dividends. Dividends Cash 2, 000. 00

Posting n n Posting – copying amounts from the journal to the ledger Periodically, journal entries are posted to ledger accounts to determine balances in each account 28

Trial Balance n List of all accounts with their balances 29

1 -30 Trial Balance Net. Solutions Trial Balance For the Month Ended November 30, 2007 Cash Supplies Land Accounts Payable Capital Stock Dividends Fees Earned Wages Expense Rent Expense Supplies Expense Utilities Expense Miscellaneous Expense Totals 5, 900. 00 550. 00 20, 000. 00 400. 00 25, 000. 00 2, 000. 00 7, 500. 00 2, 125. 00 800. 00 450. 00 275. 00 $ 32, 900. 00

Income Statement Net income is carried to the retained earnings statement

Retained Earnings Statement from the income statement to the balance sheet

Balance Sheet This amount is compared to the net cash flows on the statement of cash flows From the retained earnings statement

Statement of Cash Flows This amount should match Cash on the balance sheet.

More Transactions

Dec. 1 Net. Solutions paid rent for December, $800. The company from which Net. Solutions is renting its store space requires the payment of rent on the first of each month, rather than at the end of the month.

Dec 1 Rent Expense Cash Paid rent for December. 52 11 800 00

Net. Solutions received an offer from a local retailer to rent (for $120 per month) the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. Net. Solutions agreed to rent the land to the retailer for three months, with the rent payable in advance.

1 Cash 11 Unearned Rent Received advance payment for three months’ rent on land. 23 360 00

Dec. 4 Net. Solutions purchased office equipment on account from Executive Supply Co. for $1, 800. 4 Office Equipment Accounts Payable Purchased office equipment on account. 18 21 1 800 00

Dec. 6 Net. Solutions paid $180 for a newspaper advertisement. 6 Miscellaneous Expense Cash Paid for newspaper ad. 59 11 180 00

Dec. 11 Net. Solutions paid creditors $400. 11 Accounts Payable Cash Paid creditors on account. 21 11 400 00

Dec. 13 Net. Solutions paid a receptionist and part-time assistant $950 for two weeks’ wages. 13 Wages Expense Cash Paid two weeks’ wages. 51 11 950 00

Dec. 16 Net. Solutions received $3, 100 from fees earned for the first half of December. 16 Cash 11 Fees Earned Received fees from customers. 41 3 100 00

Dec. 16 Fees earned on account totaled $1, 750 for the first half of December. 16 Accounts Receivable Fees Earned Recorded fees earned on account. 12 41 1 750 00

Dec. 20 Net. Solutions paid $900 to Executive Supply Co. on the $1, 800 debt owed from the December 4 transaction. 20 Accounts Payable Cash Paid part of amount owed to Executive Supply Co. 21 11 900 00

Dec. 21 Net. Solutions received $650 from customers in payment of their accounts. 21 Cash 11 Accounts Receivable Received fees from customers on account. 12 650 00

Dec. 23 Net. Solutions paid $1, 450 for supplies. 23 Supplies Cash Purchased supplies. 14 11 1 450 00

Dec. 27 Net. Solutions paid the receptionist and part-time assistant $1, 200 for two weeks’ wages. 27 Wages Expense Cash Paid two weeks’ wages. 51 11 1 200 00

Dec. 31 Net. Solutions paid $310 for telephone charges for the month. 31 Utilities Expense Cash Paid telephone charges. 54 11 310 00

Dec. 31 Net. Solutions paid $225 for electric usage for the month. 31 Utilities Expense Cash Paid for electric usage. 54 11 225 00

Dec. 31 Net. Solutions received $2, 870 from fees earned for the second half of December. 31 Cash 11 Fees Earned Received fees from customers. 41 2 870 00

Dec. 31 Net. Solutions earned $1, 120 on account for the second half of December. 31 Accounts Receivable Fees Earned Recorded fees earned on account. 12 41 1 120 00

Dec. 31 Net. Solutions paid dividends of $2, 000 to stockholders. 31 Dividends Cash Paid dividends to stockholders. 33 11 2 000 00

Trial Balance