CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 7—Financial Statements for a Proprietorship Objectives: Define accounting terms related to financial statements for a service business organized as a proprietorship Identify accounting concepts and practices related to preparation financial statements for a service business organized as a proprietorship Prepare an income statement for a service business organized as a proprietorship and analyze an income statement using component percentages Prepare a balance sheet for a service business organized as a proprietorship

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 2 LESSON 7-1 Chapter 7: TERMS REVIEW Stakeholders—any persons or groups who will be affected by an action; major stakeholders include owners, employees, customers, local communities, and society Component percentage—the percentage relationship between one financial statement item and the total that includes that item; on an income statement, component percentages are calculated by dividing the amount of each component by the total amount of sales page 186

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 7-1: Preparing an Income Statement Accounting Concepts Adequate disclosure—when financial statements contain all information necessary to understand a business’ financial condition Accounting period cycle—businesses usually prepare financial statements at the end of each monthly fiscal period Going concern—when financial statements are prepared with the expectation that a business will remain in operation indefinitely

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 4 LESSON 7-1 INCOME STATEMENT INFORMATION ON A WORK SHEET page 182 An income statement reports financial information over a specific period of time, indicating the financial progress of a business in earning a net income or a net loss. The data used to prepare the Income Statement is obtained from the Income Statement columns of a work sheet.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 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. (Who) (What) (When)

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 7-1 Steps in Preparing the REVENUE, EXPENSES, AND NET INCOME SECTIONS OF AN INCOME STATEMENT page Write the name of the first section, Revenue, at the left side on the first line. 2.Write the title of the revenue account, Sales, on the next line indented. 3.Record the balance of the account on the same line in the 2 nd amount column. 4.Write the name of the 2 nd section, Expenses, on the next line on the left side. 5.Write the title of each expense account, indented. 6.Record the balance of each expense amount in the 1 st amount column. 7.Rule a single line across the 1 st amount column under the last expense amount. 8.Write the words Total Expenses on the next blank line indented. 9.Record the amount of total expenses on the same line in the 2 nd amount column. 10.Calculate and verify the amount of the net income. 11.Rule a single line across the 2 nd amount column just below the total expenses amount. 12.Write the words Net Income on the next line on the left side. 13.On the same line, record the amount of the net income in the 2 nd amount column 14.Rule double lines across both amount columns

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 Revenue, Expenses, and Net Income Sections of the Income Statement 8 LESSON 7-1 Income Statement for a service business has 4 sections: heading, revenue, expenses, and net income or loss The two columns on the income statement are not debit and credit columns. Account titles are indented under section titles to make the section titles easier to read. Account balances are listed in the first column, totals in the second column. It should always be verified that the amount of the net income or net loss is the same as that on the work sheet.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Component Percentage Analysis of an Income Statement 9 LESSON 7-1 Component Percentage--the percentage relationship between one financial statement item and the total that includes that item; on an income statement, component percentages are calculated by dividing the amount of each component by the total amount of sales Total Expenses / Total Sales = Total Expenses Component Percentage Net Income / Total Sales = Net Income Component Percentage Component percentages allow a business to compare its percentage to those of similar businesses. A business should also compare its own component percentages from one fiscal period with the percentages of previous fiscal periods.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 10 LESSON 7-1 COMPONENT PERCENTAGE ANALYSIS OF AN INCOME STATEMENT page 184

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 7-1 INCOME STATEMENT WITH TWO SOURCES OF REVENUE AND A NET LOSS page 185 If there are two sources of revenue, each source of revenue should be listed separately on the income statement, similar to the way that each expense is listed. If total expenses exceed total revenue, a net loss is reported on an income statement. Steps: 1.Write the section heading, Revenue, at the left of the wide column. 2.Write the titles of both revenue accounts in the wide column, indented. 3.Record the balance of each account in the 1 st amount column on same line. 4.Total the 2 revenue account balances. Write total amount in 2 nd column. 5.Write the words, Total Revenue, in the wide column, indented. 6.Write the words, Net Loss, at the left of the wide column. 7.Subtract total expenses from the revenue to calculate net loss. Record the amount of net loss in 2 nd amount column in parentheses. An amount written in parentheses on financial statements indicates a negative amount.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 12 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 Lesson LESSON 7-1 Let’s do Work Together 7-1 and On Your Own 7-1 from textbook page 186 on Aplia.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 7-2: Balance Sheet Information on a Work Sheet A balance sheet reports financial information on a specific date, indicating the financial condition of a business. The data used to prepare the balance sheet can be obtained from the Balance Sheet column of the work sheet. Assets = Liabilities + Owner’s Equity

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 15 LESSON 7-2 BALANCE SHEET page 187

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 16 LESSON 7-2 HEADING OF A BALANCE SHEET 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. Who What When

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 17 LESSON 7-2 Preparing the Assets and Liabilities Sections of a Balance Sheet page Write the title of the 1 st section, Assets, in the middle of the left column. 2.Write the titles of all asset accounts under the heading. 3.Record the balance of each asset account in the left amount column on the same line as the account title. 4.Write the title of the next section, Liabilities, in the middle if the right column. 5.Write the titles of all liability accounts under the heading. 6.Record the balance of each liability account in the right amount column. 7.Rule a single line across the right amount column. 8.Write the words Total Liabilities in the right wide column. 9.Record the total of all liabilities in the right amount column.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 18 LESSON 7-2 ASSETS AND LIABILITIES SECTIONS OF A BALANCE SHEET page Liabilities 1 Assets Total Liabilities8 2 Account titles 3 Asset amounts Single line 7 6 Liability amounts 5 Account titles Total of liabilities 9

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 19 LESSON 7-2 Owner’s Equity Section of a Balance Sheet page 189 If there is a net income, current capital is calculated by Current Capital = Capital Account Balance + Net Income – Drawing Account Balance When there is a net loss, current capital is calculated by Current Capital = Capital Account Balance – Net Loss – Drawing Account Balance

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 20 LESSON 7-2 Preparing the Owner’s Equity Section of a Balance Sheet page Write the title of the section, Owner’s Equity, in the middle of the right wide column. 2.Write the title of the owner’s capital account on the next line. 3.Record the current amount of owner’s equity in the right amount column. 4.Rule a single line. 5.Write the words Total Assets on the next line in the left wide column. 6.Record the amount of total assets in the left amount column. 7.Write the words Total Liabilities and Owner’s Equity on same line as Total Assets. 8.Record the amount of total liabilities & owner’s equity in the right amount column. 9.Compare the totals of the two amount columns. The totals should be the same. 10.Rule double lines across the amount columns.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 21 LESSON 7-2 OWNER’S EQUITY SECTION OF A BALANCE SHEET page Total Liab. and Owner’s Eq.5 Total Assets 1 Owner’s Equity 2 Account title 3 Capital amount 4 Single line 6 Total of assets 8 Total of Liabilities and Owner’s Equity 9 Compare totals 10 Double lines

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 22 LESSON 7-2 OWNER’S EQUITY REPORTED IN DETAIL ON A BALANCE SHEET page Write the capital account title and beginning of month date on 1 st line under words Owner’s Equity 2.Record the owner’s capital account balance at the beginning of the month in the wide column. 3.Write the words Net Income on the next line. Record the net income amount in the wide column to the left of the capital account balance. 4.Write the drawing account title on the next line. Record the balance of the drawing account in the wide column. 5.Rule a single line under the amount. 6.Subtract the balance of the drawing account from the net income. Record the difference in the wide column to the right of the drawing account balance. 7.Write the capital account title and the ending month date on the next line. 8.Add the beginning capital amount and the difference between the net income and the drawing account. Record the sum in the right amount column. 9.Write the words Total Liabilities and Owner’s Equity on the next line. Record the amount of total liabilites and owner’s equity in the right amount column.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 23 LESSON 7-2 OWNER’S EQUITY REPORTED IN DETAIL ON A BALANCE SHEET page Beginning capital amount 6 Difference 8 Current capital amount 1 Beginning capital 3 Net Income 4 Drawing Ending capital 7 9 Total Liabilities and Owner’s Equity 5 Single line

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson LESSON 7-1 Let’s do Work Together 7-2 and On Your Own 7-2 on textbook page 192 using Aplia.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 7 Assignments 25 LESSON 7-1 Study Guide Application Problem 7-1 Application Problem 7-2 Mastery Problem 7-3 Challenge Problem 7-4