Financial Statements for a Sole Proprietorship Accounting Chapter 7

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

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

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

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

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

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

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

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

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

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

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

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)

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

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

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

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?

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

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

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

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”

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