1. Income Statement and Balance Sheet Revision

2. A T-Format Balance Sheet
Title and date
Current and non-current assets and liabilities have been established
Capital has been calculated by taking total liabilities from total assets
Total assets and total liabilities have been calculated

3. Narrative Format Title Current and Non-current assets
Current and non-current liabilities
In a narrative format NET ASSETS are calculated by subtracting total liabilities from total assets

4. Narrative Format Equity is then broken down into:
Capital: What the owner has put into the business
Profit: Money made (total income, less total expenses)
Drawings: The amount the owner takes out of the business

5. Formulas to remember… NET ASSEST= Total assets less total liabilities
TOTAL EQUITY= Capital + Profit – Drawings
You may be given equity, and required to work out profit, still use this formula.

6. Current Vs. Non-current Reminder…
Asset: What is owned by the business
Liability: Money owed
Current asset: If it is likely to be converted to cash within the next 12 months eg. Accounts receivable
Non-current asset: not likely to be converted to cash within the next 12 months eg. Property
Current liability: needs to be paid within the next 12 months eg. Accounts payable
Non-current liability: does not need to be paid in the next 12 months eg. mortgage

7. What is an income statement:
While a balance sheet is used to break down assets and liabilities, an income statement is used to calculate profit and loss.
When revenue (income) exceeds expenses a profit is made
When expenses exceed revenue a loss is made

8. Importance of an income statement?
An income statement shows the financial performance of a business over a period of time. It lets interested people know how well the business is performing.
The income statement can act as proof of the profitability of a business when applying for loans. It can show the bank whether the business has enough money to repay debts etc.

9. Link to balance sheet?
The profit made by the business belongs to the owner(s), therefore the profit is transferred to the equity section of the balance sheet thereby increasing equity. Conversely, losses will reduce the equity of the business.

10. Income vs. Expenses Income Expense Money received by the business
Eg. Rent received, discount received, fees received, gain from sale of asset
Money paid by the business
Eg. Petrol, wages, rent, telephone, rates, interest paid, discount allowed

12. Income Statement Title and date Total income calculated
25,600
75,400
Income – expenses = Profit
If the figure is negative it is then a loss, and is written in brackets.
Eg. (5,000)

13. The following is a prepared income statement:$
Interest Earned
1,900
Tourist Fess
111,200
113,100
Less Expenses
Interest on Loan
2,000
General Office Exp.
18,300
Telephone Exp.
10,800
Repairs to tourist equipment
3,200
Office Salaries
36,000
Bad debts
100
Salary office staff
56,000
126,400
Profit / (loss)
(13,300)
Income added together, expenses added together
Income less expenses = -13,300
Hence a loss presented in brackets

14. Income Statements for trading businesses
Part of the income statement for a trading business is different to that of an income statement for a service business.
Main source of income for a trading business is derived from the sales of a product and therefore we must include a new element known as Cost of Goods Sold or Cost of Sales

15. Cost of Goods Sold (COGS)
COGS can include all expenses incurred to obtain the product, and prepare the item for sale. Can include:
Freight
Packaging costs
Custom duty
Any other buying expenses
The COGS figure is deducted from the sales figure to give us gross profit figure.
SALES – COGS = Gross Profit

16. For example….
Tarkan sells basketball shoes in his shop, over a year he makes 10,000 pairs which cost him $20 each including freight, material and labour.
COGS: 10,000x20= $200,000
His sales are $500,000
His Gross Profit is calculated by subtracting his COGS from his sales
His Gross Profit is $300,000

17. Complete the Income Statement
Sales- COGS = Gross Profit
21,200
Total Income – Expenses = Profit
7,000

18. What is the difference between Assets, Liabilities, Expenses and Income?
Expenses are bills that need to be paid
A liability is the debt
Eg: Mortgage is a liability, interest on the mortgage is an expense
An asset is something owned and income is money being received:
Eg: hire fees received on a ute is income, and the ute is an asset

19. Balance Sheets
Narrative Format
T-Format

20. Income Statement Income Statement for a Service Business
Income Statement for a trading (retail) business