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Financial Statements for a Sole ProprietorshipFinancial Statements for a Sole Proprietorship
Accounting Chapter 7Accounting Chapter 7
CONCEPTS – some old, some newCONCEPTS – some old, some new
Adequate Disclosure Financial statement contain all the
information on which to base decisions What would happen if information were
left out? Accounting Period Cycle
Aka fiscal period
Adequate Disclosure Financial statement contain all the
information on which to base decisions What would happen if information were
left out? Accounting Period Cycle
Aka fiscal period
CONCEPTS – some old, some newCONCEPTS – some old, some new
Going Concern Financial statements are prepared with
the expectation that a business will remain in operation indefinitely
Going Concern Financial statements are prepared with
the expectation that a business will remain in operation indefinitely
Financial Statements Financial Statements
TechKnow prepares two financial statements Income Statement and Balance Sheet
Why? End of period assessment Comparison
With past performance With competitors and industry
Goal Setting
TechKnow prepares two financial statements Income Statement and Balance Sheet
Why? End of period assessment Comparison
With past performance With competitors and industry
Goal Setting
Other Financial StatementsOther Financial Statements
Look at Best Buy (Appendix B) 11 Yr Financial Highlights Consolidated Statement of Earnings
Similar to income statement Earnings per share
Consolidate Statement of Cash Flows Where and how do we spend/receive cash
Consolidated Statements of Changes in Shareholder’s Equity
Stock issues
Look at Best Buy (Appendix B) 11 Yr Financial Highlights Consolidated Statement of Earnings
Similar to income statement Earnings per share
Consolidate Statement of Cash Flows Where and how do we spend/receive cash
Consolidated Statements of Changes in Shareholder’s Equity
Stock issues
Income StatementIncome Statement
A statement of flow What did we earn (revenue) and what
did we spend (expenses) over a specific time period
CONCEPT – Matching Expenses with Revenue
Information comes from the Income Statement columns of the Work Sheet
A statement of flow What did we earn (revenue) and what
did we spend (expenses) over a specific time period
CONCEPT – Matching Expenses with Revenue
Information comes from the Income Statement columns of the Work Sheet
Income Statement HeadingIncome Statement Heading
Name of Company
Name of Report
Date of Report
TechKnow Consulting
Income Statement
For the Month Ended August 31, 200x
Name of Company
Name of Report
Date of Report
TechKnow Consulting
Income Statement
For the Month Ended August 31, 200x
Preparing the Income StatementPreparing the Income Statement
Separate the sections: Revenue and Expenses
Indent the accounts that come under each heading (Sales, Advertising Expense, etc)
Record the Sales balance in the second column
Separate the sections: Revenue and Expenses
Indent the accounts that come under each heading (Sales, Advertising Expense, etc)
Record the Sales balance in the second column
Preparing the Income StatementPreparing the Income Statement
List each Expense account separately (indented) under the Expenses subheading
Record each expense account balance in the first column Rule a single line at the bottom of the
column Add Total Expenses (label) and
record the total expenses (amount) in the second column
List each Expense account separately (indented) under the Expenses subheading
Record each expense account balance in the first column Rule a single line at the bottom of the
column Add Total Expenses (label) and
record the total expenses (amount) in the second column
Preparing the Income StatementPreparing the Income Statement
Rule a single line under the Total Expense Amount
Subtract Total Expenses from Total Revenue and record the amount below the single line
If the result >= 0 write Net Income in the Account Title column
If the result < 0 write Net Loss in the Account Title column
Rule a single line under the Total Expense Amount
Subtract Total Expenses from Total Revenue and record the amount below the single line
If the result >= 0 write Net Income in the Account Title column
If the result < 0 write Net Loss in the Account Title column
Preparing the Income StatementPreparing the Income Statement Negative numbers (net loss) are recorded
in parentheses Rule a double line under the net
Income/Loss result If there are multiple sources of revenue
record each revenue account balance in the first column Rule a single line under the last revenue
account item Include a Total Revenue item and record
total in second column
Negative numbers (net loss) are recorded in parentheses
Rule a double line under the net Income/Loss result
If there are multiple sources of revenue record each revenue account balance in the first column Rule a single line under the last revenue
account item Include a Total Revenue item and record
total in second column
Component PercentagesComponent Percentages
Useful for comparison with industry, past performance and competitors
Total Expenses Component Percentage Total Expenses/Total Sales(*100) How much do we spend per $1 sale
Net Income Component Percentage Net Income/Total Sales(*100) How much do we earn per $1 sale? TECP +NICP = 100
Useful for comparison with industry, past performance and competitors
Total Expenses Component Percentage Total Expenses/Total Sales(*100) How much do we spend per $1 sale
Net Income Component Percentage Net Income/Total Sales(*100) How much do we earn per $1 sale? TECP +NICP = 100
Balance SheetBalance Sheet
Reports financial information on a specific date Snapshot in time
Accounts included on a balance sheet: Assets (what we have) Liabilities (what we owe) Owner’s Equity (what we are worth)
Reports financial information on a specific date Snapshot in time
Accounts included on a balance sheet: Assets (what we have) Liabilities (what we owe) Owner’s Equity (what we are worth)
Balance Sheet HeadingBalance Sheet Heading
Name of Company
Name of Report
Date of Report
TechKnow Consulting
Balance Sheet
August 31, 200x
Name of Company
Name of Report
Date of Report
TechKnow Consulting
Balance Sheet
August 31, 200x
Asset and Liabilities Sections of the Balance Sheet (pg. 188)
Asset and Liabilities Sections of the Balance Sheet (pg. 188)
The balance sheet represents the accounting equation (A=L+OE)
Assets are recorded in the left wide column
Title each section in the center of the column
List each account under the heading List the account balance on the
same line as the account title
The balance sheet represents the accounting equation (A=L+OE)
Assets are recorded in the left wide column
Title each section in the center of the column
List each account under the heading List the account balance on the
same line as the account title
Asset and Liabilities Sections of the Balance Sheet
Asset and Liabilities Sections of the Balance Sheet
Follow the same steps for the Liabilities section
Rule a single line under the liability account balances
Write Total Liabilities on the next line under the liability account titles
Total the liabilities and record the sum below the single ruled line
Follow the same steps for the Liabilities section
Rule a single line under the liability account balances
Write Total Liabilities on the next line under the liability account titles
Total the liabilities and record the sum below the single ruled line
Owner’s Equity Section (pg 189)Owner’s Equity Section (pg 189)
Center the title Owner’s Equity in the left wide column directly under Total Liabilities
Write the title of the capital account on the next line
Record the capital amount on the same line How is capital computed?
Center the title Owner’s Equity in the left wide column directly under Total Liabilities
Write the title of the capital account on the next line
Record the capital amount on the same line How is capital computed?
Calculating CapitalCalculating Capital
The drawing account is not always included on the balance sheet Drawing is a drain on capital
Current Capital = Capital Account Balance + Net Income – Drawing
If there is a Net Loss:
Current Capital = Capital Account Balance – Net Loss - Drawing
The drawing account is not always included on the balance sheet Drawing is a drain on capital
Current Capital = Capital Account Balance + Net Income – Drawing
If there is a Net Loss:
Current Capital = Capital Account Balance – Net Loss - Drawing
Back to Owner’s EquityBack to Owner’s Equity
Rule a single line under the last amount in the Asset column
Write Total Assets on the next account title line and record the amount below the single ruled line
Rule a single line in the same place on the right column
Write Total Liab. And OE in the account title line and record the total
Rule a single line under the last amount in the Asset column
Write Total Assets on the next account title line and record the amount below the single ruled line
Rule a single line in the same place on the right column
Write Total Liab. And OE in the account title line and record the total
Finding BalanceFinding Balance
Compare the totals of the two columns
If they are the same, the balance sheet is in balance If not, find and correct mistakes Check the calculation of capital
Rule double lines across both columns to show that the totals have been verified
Compare the totals of the two columns
If they are the same, the balance sheet is in balance If not, find and correct mistakes Check the calculation of capital
Rule double lines across both columns to show that the totals have been verified
Detailed OE Section (pg 190)Detailed OE Section (pg 190)
Title the Owner’s Equity section Write Capital (beginning date) and
record the amount Do not record the amount in the ruled
column Write and record Net Income
Do not record NI directly below Beg. Capital Write and record Drawing directly below
Net Income “Less (owner) Drawing”
Title the Owner’s Equity section Write Capital (beginning date) and
record the amount Do not record the amount in the ruled
column Write and record Net Income
Do not record NI directly below Beg. Capital Write and record Drawing directly below
Net Income “Less (owner) Drawing”
Detailed OE SectionDetailed OE Section
Rule a single line under the amount and at the same place below Beg. Capital
Subtract drawing from NI and record total below the Beginning Capital
Write (Owner) Capital, date of report and record the total in the right hand column
Proceed as you would for a standard Balance Sheet
WT 7-2.xls
Rule a single line under the amount and at the same place below Beg. Capital
Subtract drawing from NI and record total below the Beginning Capital
Write (Owner) Capital, date of report and record the total in the right hand column
Proceed as you would for a standard Balance Sheet
WT 7-2.xls
