Preparing Financial Documents The Income Statement & Balance Sheet

The Income Statement A financial statement that indicates how much money a business earns or loses during a period of time. This document indicates how much profit or loss a business expects and is sometimes called a Profit and Loss Statement. A new business should prepare an Income Statement monthly as a way to monitor whether making a profit or not.

Income Statement Parts of the Income Statement REVENUE FROM SALES -Cost of Goods Sold =GROSS PROFIT ON SALES -Operating Expenses =NET INCOME FROM OPERATIONS -Interest Expense from loans =NET INCOME BEFORE TAXES -Taxes owed =NET INCOME AFTER TAXES

Income Statement Gross Sales (Amount of all sales for the period based on receipts) -Returns and Allowances (Merchandise returned or adjustment in charges to customers) =Revenue from Sales (Sales before cost of goods adjustment) Calculating Revenue from Sales

Income Statement =Net Sales Beginning Inventory (Ending Inventory from last month) -Purchases (New inventory purchased) Total Goods Available for Sale -Ending Inventory (Inventory left unsold) =Total Cost of Goods Sold Net Sales - Total Cost of Goods Sold =GROSS PROFIT ON SALES Calculating Gross Profit on Sales

Income Statement GROSS PROFIT ON SALES -Total Operating Expenses (including both startup costs, continuing costs, loan payments, etc.) =NET INCOME FROM OPERATIONS Calculating Net Income from Operations

Income Statement NET INCOME FROM OPERATIONS - Interest expense = Net Income Before Taxes - Federal Income Taxes = Net Income After Taxes Calculating Net Income Before and After Taxes

Sample Income Statement For a sample of an Income Statement, click on the Income Statement Sample file in this lesson. Use this as a guide when creating your Income Statement.

Balance Sheet A financial document that shows Assets Liabilities Capital (net worth) The balance sheet is based on the following equation: Assets = Liabilities + Owner’s Equity

Balance Sheet Assets (What a business owns) Current Assets Cash Accounts receivable (owed by others) Notes receivable Inventory Fixed Assets Equipment Furniture Vehicles

Balance Sheet Liabilities (What a business owes) Current Liabilities  Accounts payable (to other companies)  Notes payable (to banks, etc.)  Salaries  Income taxes payable Long-term Liabilities  Mortgage/Loans payable  Notes payable

Balance Sheet Equation for the Balance Sheet Assets = Liabilities + Owner’s Equity If you have calculated your balance sheet correctly, the above formula will be true.

Balance Sheet For a sample of an Income Statement, click on the Income Statement Sample file in this lesson. Use this as a guide when creating your Income Statement.