CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 7 Objectives 1.Define accounting terms related to financial statements for a service business organized as a proprietorship. 2.Identify accounting concepts and practices related to preparation of financial statements. 1 LESSON 7-1

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 7 Objectives 3.Prepare an income statement for a service business and analyze an income statement using component percentages. 4.Prepare a balance sheet for a service business organizes as a proprietorship. 2 LESSON 7-1

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 7-1 Preparing an Income Statement

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Accounting Terms Financial Statements—Summarized statements needed by managers and owners to make good business decisions. Adequate Disclosure—Applied when financial statements contain all information necessary to understand a business’s financial condition. Nothing left out! Report EVERYTHING! Stakeholders—Any person or group who will be affected by an action of the business 4 LESSON 7-1

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 LESSON 7-1 INCOME STATEMENT INFORMATION ON A WORK SHEET page 182 Income Statement—Reports financial information over a specific period of time, indicating the financial PROGRESS of a business in earning NET INCOME or NET LOSS.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 7-1 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.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 7 LESSON 7-1 REVENUE, EXPENSES, AND NET INCOME SECTIONS OF AN INCOME STATEMENT 1 Revenue 3 Revenue amount 4 Expenses 5 Account titles 6 Expense amount 8 Total expenses 9 Total of expenses 12 Net Income 7 Single line Calculate net income 14 Double lines 13 Record net income 2 Account title page 183

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Analysis of Component Percentages Component Percentage—The Percentage relationship between one financial statement item and the TOTAL that INCLUDES that item. That PORTION or PART of the TOTAL. Magic Number—Divide ALL numbers on the Income Statement by the Magic Number which is TOTAL SALES! Divide ALL numbers by this number to get the component percentage. Acceptable Component Percentages—Compare your business to other business’s of the same type. Can compare to trade magazines or publications OR compare your percentages to PREVIOUS fiscal periods. 8 LESSON 7-1

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 9 LESSON 7-1 COMPONENT PERCENTAGE ANALYSIS OF AN INCOME STATEMENT page 184 Divide ALL by Magic Number!

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 10 LESSON 7-1 INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS 1 Revenue 3 Revenue amounts 2 Account titles 6 Net Loss 7 Record Net Loss 5 Total Revenue 4 Total of revenue page 185

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 7-1 TERMS REVIEW stakeholders component percentage page 186

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Audit Your Understanding 1.List the four sections of an income statement. 2.What is the formula for calculating the total expenses component percentage? 3.What is the formula for calculating the net income component percentage? 12 LESSON 7-1