2. Financial Statements for a Sole Proprietorship Chapter 9

3. The Accounting Cycle

4. Why did we make a Worksheet? 1. Show that debits equal credits. 2.Make needed adjustments for supplies, insurance used up during the fiscal period. 3.Organize information so that it can be used to prepare financial statements. 4.Calculate net income or net loss.

5. Managers and owners need information Managers and owners need information to make business decisions. To get this information, they could look at the general ledger – but it contains a lot of information The general ledger information must be organized, summarized and reported.

6. Information is provided through financial statements GAAP says financial statements must be prepared at the end of an accounting cycle -- known as the fiscal period AND Financial statements must report ALL financial information – cannot be incomplete. This is called adequate disclosure.

7. Two basic financial statements The two basic financial statements we will look at are: 1.Income Statement, and 2.Balance Sheet

8. Income Statement An income statement is like a video / moving picture; It reports financial information over a period of time It shows the financial progress of the business in earning a net income or a net loss.

9. Balance Sheet The balance sheet is like a snapshot or digital photo; It shows financial information on a specific date It shows the financial condition of a business by reporting the assets, liabilities, and owner’s equity

10. Income Statement Income statement reports revenue and expenses. Revenue – earnings of a business from business activity Expenses – amounts paid by a business to operate the business and earn revenue Revenue earned and expenses incurred to earn that revenue are reported in the same fiscal period (match expenses and revenue)

11. Preparing an Income Statement Get information from the Worksheet: 2 places 1.Take account titles from the worksheet’s account titles column 2.Take account balances from the worksheet’s Income Statement columns.

12. Parts of an Income Statement The Income Statement for a service business has 4 parts: 1.Heading 2.Revenue 3.Expenses 4.Net income or net loss

13. Heading 3 parts, just like a Worksheet: 1.The name of a business; 2.The name of the statement; 3.The date of the statement

14. Sample Heading Ben’s Lemonade Stand Income Statement For year ended Dec. 31, 2014

15. Revenue Section Ben’s Lemonade Stand Income Statement For year ended Dec. 31, 2014 Revenue : Sales $4,291.00

16. Revenue Section 1.Write Revenue in the most left hand column on the first line. 2.Write the title of the revenue account on the next line, indented about one centimeter. 3.Record the balance of the account on the same line in the second amount column

17. More than one Revenue Source If there is more than one source of revenue List each revenue source in the wide column, under Revenue. Each title should be indented. Write the account balance in the first column.

18. More than one Revenue Source Total the revenue accounts. Write Total Revenue in the wide column. Put the total revenue amount in the second column.

19. Revenue Section Ben’s Lemonade Stand Income Statement For year ended Dec. 31, 2014 Revenue : Sales Revenue $3,291.00 Interest Revenue $1,000.00 Total Revenue $4,291.00

20. Revenue Section Ben’s Lemonade Stand Income Statement For year ended Dec. 31, 2014 Revenue : Sales - Lawns $3,291.00 Sales – Tree Care $1,000.00 Total Sales $4,291.00

21. Expenses Section Ben’s Lemonade Stand Income Statement For year ended Dec. 31, 2014 Revenue: Sales$4,291.00 Expenses: Advertising Expense $1,000.00 Utilities Expense $2,000.00 Total Expenses $3,000.00

22. Expenses Section 1.Write Expenses at the extreme left of the first (wide) column on the next blank line. 2.Write the title of each expense account on a separate line in the same column, indented about one centimeter. 3.Record the balance of each expense account in the first amount column on the same line as the account title.

23. Net Income Section Ben’s Lemonade Stand Income Statement For Year ended Dec. 31, 2014 Revenue: Sales $4,291.00 Expenses: Advertising Expense $1,000.00 Utilities Expense $2,000.00 Total Expenses $3,000.00 Net Income $1,291.00

24. Net Loss If there is a Net Loss, write the word Net Loss instead of Net Income. Subtract total expenses from total revenue. Write the amount of Net Loss in parentheses, to show that it is a negative number.

25. Net Loss Section Ben’s Lemonade Stand Income Statement For Year ended Dec. 31, 2014 Revenue: Sales $4,291.00 Expenses: Advertising Expense $3,000.00 Utilities Expense $2,000.00 Total Expenses $5,000.00 Net Loss ($ 709.00)

26. Component Percentage Analysis For a service business, the revenue reported on an income statement includes 2 components: 1.Total Expenses 2.Net Income Owners / managers analyze the relation between these 2 items and total sales. The percentage relationship between each item and total sales is the component percentage.

27. Total Expenses Component Percentage Total Expenses __________ = Total Expenses Total Component % Sales

28. Total Expenses Component Percentage Total Expense $3,000 Total Expenses _________ = Component % Total 70% Sales $4,291.00

29. What is a good Total Expenses Component? For a service business, an acceptable total expenses component is not more than 80%.

30. Component % Ben’s Lemonade Stand Income Statement For Year ended Dec. 31, 2014 Revenue: % of Sales Sales $4,291.00 100% Expenses: Advertising Expense $1,000.00 Utilities Expense $2,000.00 Total Expenses $3,000.00 70% Net Income $1,291.00 30%

31. Net Income Component % Net Income _____________ = Component % Total Sales

32. Net Income Component % Net Income $1,291.00Net Income _____________ = Component Total Sales % $4,291.00 30%

33. Component % Ben’s Lemonade Stand Income Statement For Year ended December 31, 2014 % of Sales Revenue: Sales $4,291.00 100% Expenses: Advertising Expense $1,000.00 Utilities Expense $2,000.00 Total Expenses $3,000.00 70% Net Income $1,291.00 30%

34. Net Income Component % What is a good Net Income Component Percentage? For a service business, an acceptable Net Income Component Percentage is not less than 20%. (If there is a Net Loss, the Component Percentage is put in parentheses.)

35. Review quiz 1.What are the parts of an Income Statement? 2.Name the two percentage components that you calculate in an Income Statement.

36. Balance Sheet The balance sheet is like a snapshot or digital photo; It shows financial information on a specific date It shows the financial condition of a business by reporting the assets, liabilities, and owner’s equity

37. Information for Balance Sheet The information used to prepare the Balance Sheet also comes from 2 places on the Worksheet: 1.The account titles come from the account titles column; 2.The account balances come from the Balance Sheet columnns.

38. Parts of a Balance Sheet A balance sheet has 4 parts: 1.Heading 2.Assets 3.Liabilities 4.Owner’s Equity

39. Heading of a Balance Sheet The heading of a Balance Sheet has 3 parts (just like a Worksheet and an Income Statement): 1.Name of the business, 2.Name of the statement, 3.Date of the statement.

40. Sample Heading Ben’s Lemonade Stand Balance Sheet December 31, 2014

41. Assets Section The Assets section is on the left side of the Balance Sheet, just as assets are on the left side of the accounting equation (Assets = Liabilities + Owner’s Equity)

42. Assets Section Information needed to prepare the Assets section is taken from the Account Title column and which Balance Sheet column on the Worksheet? DEBIT

43. Assets Section Ben’s Lemonade Stand Balance Sheet December 31, 2014 Assets Cash$8,272.00 Petty Cash 200.00 Supplies 2,284.00 Prepaid Insurance 1,100.00

44. Assets Section 1.Write the title of the section, Assets, in the middle of the left wide column. 2.Under the title, write the titles of each of the asset accounts. 3.Record the balance of each asset account in the left amount column on the same line as the account title.

45. Equities Section There are two kinds of equities reported on a balance sheet: 1.Liabilities, and 2.Owner’s Equity Equities go on the right side of a balance sheet, just as they go on the right side of the accounting equation.

46. Liabilities Liabilities go first. The information needed to prepare the Liabilities section of the balance sheet comes from the Account Titles column and which Balance Sheet column of the Worksheet? CREDIT

47. Liabilities Section Ben’s Lemonade Stand Balance Sheet December 31, 2014 Assets Liabilities Cash$8,272.00 Butler Cleaning, Account Payable $1,360.00 Petty Cash 200.00 Comerica Bank, Note Payable 200.00 ________ Supplies 2,284.00Total Liabilities 1,560.00 Prepaid Insurance 1,100.00

48. Liabilities Section 1.Write the title of the section, Liabilities, in the middle of the right wide column. 2.Under this heading, write the titles of all the liability accounts. 3.Record the balance of each liability account in the right amount column on the same line as the title of the account. 4.Rule a single line across the column (to indicate addition) (continued on next slide)

49. Liabilities Section (continued) 5.Write the words “Total Liabilities” in the right wide column on the next blank line (flush with the margin). 6.Add the Liabilities and write the total (the sum) in the right amount column.

50. Owner’s Equity Small businesses frequently report only the amount of current owner’s capital on the balance sheet. To calculate current capital, look at the Worksheet’s Balance Sheet Debit and Credit columns.

51. Current Owner’s Capital To calculate current capital: Capital Net Drawing Account + Income - Account = Current Balance Balance Capital

52. Owner’s Equity Section Take the title of the owner’s capital account from the work sheet’s Account Title column. Owner’s Equity is reported on the right side of the balance sheet (just as it is on the right side of the Accounting Equation) below Liabilities

53. Owner’s Equity Section Ben’s Lemonade Stand Balance Sheet December 31, 2014 AssetsLiabilities Cash$8,272.00 Butler Cleaning, Account Payable$ 1,360.00 Petty Cash 200.00 Comerica Bank, Note Payable 200.00 ________ Supplies 2,284.00Total Liabilities 1,560.00 Prepaid Insurance 1,100.00Owner’s Equity Ben Radlick, Capital10,296.00 Total Assets11,856.00Total Liabilities and Owner’s Equity 11,856.00

54. Owner’s Equity Section