LESSON 7-1. Preparing an Income Statement. CENTURY 21 ACCOUNTING Thomson/South-Western

Transcription

1 LESSON 7-1 Preparing an Income Statement

2 2 TERMS REVIEW page 186 Component Percentage the percentage relationship between one financial statement item and the total that includes that item Adequate Disclosure Concept is applied when financial statements contain all information necessary to understand a business s financial condition Going Concern Concept is applied when financial statements are prepared with the expectation that a business will remain in operation indefinitely LESSON 7-1

3 3 Reporting Financial Information The financial information needed by managers and owners to make good business decision can be found in the general ledger accounts. However, the information in the general ledger is very detailed. To make this general ledger information more usable, the information is summarized, organized, and reported to the owners and managers. All financial information must be reported if good business decisions are to be made. Income Statement and Balance Sheet LESSON 7-1

4 4 Income Statement Reports financial information over a specific period of time, indicating the financial progress of a business in earning a net income or net loss Expenses the amounts a business pays to operate the business and earn the revenue Information needed to prepare the income statement is obtained from two (2) places on the worksheet: Account Titles (from account title column) Account Balances (from Income Statement Columns) Income Statements has four (4) sections: Heading Revenue Expenses Net Income or Net Loss LESSON 7-1

5 INCOME STATEMENT INFORMATION ON A WORK SHEET page LESSON 7-1

6 6 HEADING OF AN INCOME STATEMENT page Center the name of the company on the first line. 2. Center the name of the report on the second line. 3. Center the date of the report on the third line. LESSON 7-1

7 REVENUE, EXPENSES, AND NET INCOME SECTIONS OF AN INCOME STATEMENT page Single line 7 Revenue Expenses Account title 3 Revenue amount Account titles 5 6 Expense amount Total expenses 8 9 Total of expenses 12 Net Income 14 Double lines 13 Record net income 11 Single line 10 Calculate net income LESSON 7-1

8 8 Component Percentages Component Percentage the percentage relationship between one financial statement item and the total that includes that item Acceptable total expenses component percentage should not be more than 55.0% (for most businesses) Acceptable net income component percentage should not be less than 45.0% (for most businesses) Calculated by dividing the amount of each component by the total amount of sales (1 ) Total Expenses Component Percentages: Total Expenses Total Sales = Total Expenses Component $1,466 $3,565 = 41.1% (2) Net Income Component Percentages: Net Income Total Sales = Total Expenses Component $2,099 $3,565 = 58.9% LESSON 7-1

9 COMPONENT PERCENTAGE ANALYSIS OF AN INCOME STATEMENT page LESSON 7-1

10 INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS page Total Revenue Revenue Account titles Revenue amounts 4 Total of revenue Net Loss 6 7 Record Net Loss LESSON 7-1

11 LESSON 7-2 Balance Sheet Information on a Work Sheet

12 12 Balance Sheet Reports financial information on a specific date (for example: November 4, 2013), indicating the financial condition of a business Financial Condition of a business refers to its financial strength If a business has adequate available 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 Information about assets, liabilities, and owner s equity might be obtained from the general ledger accounts or from a work sheet However, the information is easier to use if reported in an organized manner such as on a balance sheet LESSON 7-2

13 13 Balance Sheet Information needed to prepare a Balance Sheet is obtained from two (2) places on the work sheet 1. Account Titles from the account title column 2. Account Balances from the balance sheet columns Balance Sheet has four (4) sections: 1. Heading 2. Assets 3. Liabilities 4. Owner s Equity LESSON 7-2

14 14 BALANCE SHEET (on the Work Sheet) page 187 LESSON 7-2

15 15 HEADING OF A BALANCE SHEET page 187 LESSON 7-2

16 ASSETS AND LIABILITIES SECTIONS OF A BALANCE SHEET page LESSON 7-2

17 OWNER S EQUITY SECTION OF A BALANCE SHEET page 189 A balance sheet reports information about the elements of the accounting equation: Assets = Liabilities + Owner s Equity (T Account) 17 LESSON 7-2

18 How to Calculate Current Capital for the Balance Sheet 18 Only the amount of current capital is reported on the balance sheet: Capital Account Balance Net Income Drawing Account Balance Current Capital $5,000 + $2,099 - $625 = $6,474 Capital Account Balance Net Loss Drawing Account Balance Current Capital $12,000 - $200 - $500 = $11,300 LESSON 7-2

19 OWNER S EQUITY REPORTED IN DETAIL ON A BALANCE SHEET page Net Income Current capital amount 8 1 Beginning capital Difference 6 Beginning capital amount 2 7 Ending capital 5 Single line 4 Drawing 9 Total Liabilities and Owner s Equity LESSON 7-2