ACCOUNTING 2 CHAPTER 2.2

FINANCIAL STATEMENTS The Income Statement The Statement of Retained Earnings The Balance Sheet

INCOME STATEMENT 1.Revenue 2.Cost of Merchandise Sold 3.Gross Profit on Sales 4.Operating Expenses 5.Net Income

REVENUE Net sales = Sales – Sales Discounts – Sales Returns and Allowances Net Sales

COST OF MERCHANDISE SOLD Beginning Merchandise Inventory +Net Purchases* =Cost of Merchandise Available for Sale -Ending Merchandise Inventory =Cost of Merchandise Sold *Purchases +Transportation In =Cost of Delivered Merchandise -Purchase Discounts -Purchase returns and Allowances =Net Purchases

GROSS PROFIT ON SALES Net Sales -Cost of Merchandise Sold =Gross Profit On Sales

OPERATING EXPENSES List all Expenses in order except Federal Corporate Tax

NET INCOME Gross Profit on Sales -Total Operating Expenses =Operating Income -Federal Corporate Income Taxes =Net Income

STATEMENT OF RETAINED EARNINGS Must be completed before Balance Sheet after Income Statement Increased by net income Decreased by net loss Decreased by distribution of earnings to stock holders Beginning Retained Earnings and net income from the worksheet Ending Retained Earnings goes on balance sheet

BALANCE SHEET A report of the accounting equation Assets, Liabilities and Capital Stock come from the worksheet Retained Earnings come from the Statement of Retained Earnings

CLOSING ENTRIES Close all temporary accounts to the Income Summary Account Information comes from the Income Statement

CLOSING ENTRIES Close Expenses to Income Summary Close Income Summary to Retained Earnings

POSTING CLOSING ENTRIES

POST-CLOSING TRIAL BALANCE Shows Balances in permanent accounts only Proves debits and credits equal Ensures temp accounts are closed