Income Statement and Balance Sheet Revision

A T-Format Balance Sheet Title and date Current and non-current assets and liabilities have been established Capital has been calculated by taking total liabilities from total assets Total assets and total liabilities have been calculated

Narrative Format Title Current and Non-current assets Current and non-current liabilities In a narrative format NET ASSETS are calculated by subtracting total liabilities from total assets

Narrative Format Equity is then broken down into: Capital: What the owner has put into the business Profit: Money made (total income, less total expenses) Drawings: The amount the owner takes out of the business

Formulas to remember… NET ASSEST= Total assets less total liabilities TOTAL EQUITY= Capital + Profit – Drawings You may be given equity, and required to work out profit, still use this formula.

Current Vs. Non-current Reminder… Asset: What is owned by the business Liability: Money owed Current asset: If it is likely to be converted to cash within the next 12 months eg. Accounts receivable Non-current asset: not likely to be converted to cash within the next 12 months eg. Property Current liability: needs to be paid within the next 12 months eg. Accounts payable Non-current liability: does not need to be paid in the next 12 months eg. mortgage

What is an income statement: While a balance sheet is used to break down assets and liabilities, an income statement is used to calculate profit and loss. When revenue (income) exceeds expenses a profit is made When expenses exceed revenue a loss is made

Importance of an income statement? An income statement shows the financial performance of a business over a period of time. It lets interested people know how well the business is performing. The income statement can act as proof of the profitability of a business when applying for loans. It can show the bank whether the business has enough money to repay debts etc.

Link to balance sheet? The profit made by the business belongs to the owner(s), therefore the profit is transferred to the equity section of the balance sheet thereby increasing equity. Conversely, losses will reduce the equity of the business.

Income vs. Expenses Income Expense Money received by the business Eg. Rent received, discount received, fees received, gain from sale of asset Money paid by the business Eg. Petrol, wages, rent, telephone, rates, interest paid, discount allowed

Income Statement Title and date Total income calculated 25,600 75,400 Income – expenses = Profit If the figure is negative it is then a loss, and is written in brackets. Eg. (5,000)

The following is a prepared income statement: $ Interest Earned 1,900 Tourist Fess 111,200 113,100 Less Expenses Interest on Loan 2,000 General Office Exp. 18,300 Telephone Exp. 10,800 Repairs to tourist equipment 3,200 Office Salaries 36,000 Bad debts 100 Salary office staff 56,000 126,400 Profit / (loss) (13,300) Income added together, expenses added together Income less expenses = -13,300 Hence a loss presented in brackets

Income Statements for trading businesses Part of the income statement for a trading business is different to that of an income statement for a service business. Main source of income for a trading business is derived from the sales of a product and therefore we must include a new element known as Cost of Goods Sold or Cost of Sales

Cost of Goods Sold (COGS) COGS can include all expenses incurred to obtain the product, and prepare the item for sale. Can include: Freight Packaging costs Custom duty Any other buying expenses The COGS figure is deducted from the sales figure to give us gross profit figure. SALES – COGS = Gross Profit

For example…. Tarkan sells basketball shoes in his shop, over a year he makes 10,000 pairs which cost him $20 each including freight, material and labour. COGS: 10,000x20= $200,000 His sales are $500,000 His Gross Profit is calculated by subtracting his COGS from his sales His Gross Profit is $300,000

Complete the Income Statement Sales- COGS = Gross Profit 21,200 Total Income – Expenses = Profit 7,000

What is the difference between Assets, Liabilities, Expenses and Income? Expenses are bills that need to be paid A liability is the debt Eg: Mortgage is a liability, interest on the mortgage is an expense An asset is something owned and income is money being received: Eg: hire fees received on a ute is income, and the ute is an asset

Balance Sheets Narrative Format T-Format

Income Statement Income Statement for a Service Business Income Statement for a trading (retail) business