1. Financial Statements for a Sole Proprietorship
Accounting Chapter 7

2. CONCEPTS – some old, some new
Adequate Disclosure
Financial statement contain all the information on which to base decisions
What would happen if information were left out?
Accounting Period Cycle
Aka fiscal period

3. CONCEPTS – some old, some new
Going Concern
Financial statements are prepared with the expectation that a business will remain in operation indefinitely

4. Financial Statements TechKnow prepares two financial statements Why?
Income Statement and Balance Sheet
Why?
End of period assessment
Comparison
With past performance
With competitors and industry
Goal Setting

5. Other Financial Statements
Look at Best Buy (Appendix B)
11 Yr Financial Highlights
Consolidated Statement of Earnings
Similar to income statement
Earnings per share
Consolidate Statement of Cash Flows
Where and how do we spend/receive cash
Consolidated Statements of Changes in Shareholder’s Equity
Stock issues

6. Income Statement A statement of flow
What did we earn (revenue) and what did we spend (expenses) over a specific time period
CONCEPT – Matching Expenses with Revenue
Information comes from the Income Statement columns of the Work Sheet

7. Income Statement Heading
Name of Company Name of Report Date of Report TechKnow Consulting Income Statement For the Month Ended August 31, 200x

8. Preparing the Income Statement
Separate the sections: Revenue and Expenses
Indent the accounts that come under each heading (Sales, Advertising Expense, etc)
Record the Sales balance in the second column

9. Preparing the Income Statement
List each Expense account separately (indented) under the Expenses subheading
Record each expense account balance in the first column
Rule a single line at the bottom of the column
Add Total Expenses (label) and record the total expenses (amount) in the second column

10. Preparing the Income Statement
Rule a single line under the Total Expense Amount
Subtract Total Expenses from Total Revenue and record the amount below the single line
If the result >= 0 write Net Income in the Account Title column
If the result < 0 write Net Loss in the Account Title column

11. Preparing the Income Statement
Negative numbers (net loss) are recorded in parentheses
Rule a double line under the net Income/Loss result
If there are multiple sources of revenue record each revenue account balance in the first column
Rule a single line under the last revenue account item
Include a Total Revenue item and record total in second column

12. Component Percentages
Useful for comparison with industry, past performance and competitors
Total Expenses Component Percentage
Total Expenses/Total Sales(*100)
How much do we spend per $1 sale
Net Income Component Percentage
Net Income/Total Sales(*100)
How much do we earn per $1 sale?
TECP +NICP = 100

13. Balance Sheet Reports financial information on a specific date
Snapshot in time
Accounts included on a balance sheet:
Assets (what we have)
Liabilities (what we owe)
Owner’s Equity (what we are worth)

14. Balance Sheet Heading
Name of Company Name of Report Date of Report TechKnow Consulting Balance Sheet August 31, 200x

15. Asset and Liabilities Sections of the Balance Sheet (pg. 188)
The balance sheet represents the accounting equation (A=L+OE)
Assets are recorded in the left wide column
Title each section in the center of the column
List each account under the heading
List the account balance on the same line as the account title

16. Asset and Liabilities Sections of the Balance Sheet
Follow the same steps for the Liabilities section
Rule a single line under the liability account balances
Write Total Liabilities on the next line under the liability account titles
Total the liabilities and record the sum below the single ruled line

17. Owner’s Equity Section (pg 189)
Center the title Owner’s Equity in the left wide column directly under Total Liabilities
Write the title of the capital account on the next line
Record the capital amount on the same line
How is capital computed?

18. Calculating Capital
The drawing account is not always included on the balance sheet
Drawing is a drain on capital
Current Capital = Capital Account Balance + Net Income – Drawing
If there is a Net Loss:
Current Capital = Capital Account Balance – Net Loss - Drawing

19. Back to Owner’s Equity
Rule a single line under the last amount in the Asset column
Write Total Assets on the next account title line and record the amount below the single ruled line
Rule a single line in the same place on the right column
Write Total Liab. And OE in the account title line and record the total

20. Finding Balance Compare the totals of the two columns
If they are the same, the balance sheet is in balance
If not, find and correct mistakes
Check the calculation of capital
Rule double lines across both columns to show that the totals have been verified

21. Detailed OE Section (pg 190)
Title the Owner’s Equity section
Write Capital (beginning date) and record the amount
Do not record the amount in the ruled column
Write and record Net Income
Do not record NI directly below Beg. Capital
Write and record Drawing directly below Net Income
“Less (owner) Drawing”

22. Detailed OE Section
Rule a single line under the amount and at the same place below Beg. Capital
Subtract drawing from NI and record total below the Beginning Capital
Write (Owner) Capital, date of report and record the total in the right hand column
Proceed as you would for a standard Balance Sheet
WT 7-2.xls