Unit 7

Preparation of Financial Statements

I. Statement of Comprehensive Income / Income Statement

This financial statement shows the company’s performance for a given period. It
contains the revenues earned and expenses incurred by the business. When the
revenues exceed the total amount of expenses, the business has net income. If the
expenses exceed the revenues, there is a net loss. If the amount of expenses is equal
to total revenues, the scenario is called “breakeven point”

Below is an example of an Income Statement

Chatchu-on Car Spa

Income Statement
for the month ended January 2020
(In Philippine Peso)

Service Revenue 52,000

Less: Expenses
Salaries Expense 20,000
Repairs Expense 5,000
Supplies Expense 1,500
Depreciation Expense 10,000 36,500

Net Income 15,500

Notice in the heading the phrase “for the month ended”. This is an important part of
the heading that tells the users of information that the details in this financial
statement are only for that specific period.

The ₱15,500 is labelled as net income since the total revenues is greater than the
aggregate expenses.

There is also a phrase on the last line of the heading that says “in Philippine Peso”.
This line is not really required. This is put on the heading to do away with putting the
peso sign to the amounts. If your financial statement doesn’t have that line, you shall
still put the peso sign.

Notice also the double rule below the amount of the net income/ net loss.

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II. Statement of Changes in Equity

This financial statement shows the increase or decrease of the owner’s equity. The
increase in equity or capital is brought about by the net income and additional
investment. The decrease, on the other hand, is brought about by net loss and
withdrawals.

Below is an example of a Statement of Changes in Equity

Chatchu-on Car Spa

Statement of Changes in Equity
for the month ended January 2020
(In Philippine Peso)

Moksri, Capital- January 1 1,323,000

Add: Net Income 15,500
Subtotal 1,338,500
Less: Moksri, Withdrawal 10,000

Moksri, Capital- January 31 1,328,500

Notice that the net income is added to the beginning capital. If the result of operation
is a net loss, the amount shall be deducted from the beginning capital.

The withdrawal is deducted from the subtotal to get the ending capital. If it is an
additional investment, it will be added to the subtotal.

The ₱1,328,500 is the ending capital for the month of January and will therefore be
the beginning capital next month.

III. Statement of Financial Position/ Balance Sheet

The Balance Sheet contains the three (3) elements namely assets, liabilities, and
capital. The total amount of assets must be equal to the sum of the total liabilities
and capital.

This financial statement shows the company’s financial condition and will help the
users of financial information assess the company’s ability to pay its debts.

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 Below is an example of a Balance Sheet/ Statement of Financial Position

Chatchu-on Car Spa

Statement of Financial Position
as of January 31, 2020
(In Philippine Peso)

ASSETS
Current Assets
Cash 150,000
Accounts Receivable 8,000
Supplies 500
Total Current Assets 158,500

Non-Current Assets
Land 1,500,000
Machinery 200,000
Accumulated Depreciaiton- Machinery 10,000 190,000
Total Non-Current Assets 1,690,000

TOTAL ASSETS 1,848,500

LIABILITIES
Current Liabilities
Accounts Payable 15,000
Accrued Repairs 5,000
Total Current Liabilities 20,000

Non-Current Liabilities
Loans Payable 500,000
Total Non-Current Liabilities 500,000

TOTAL LIABILITIES 520,000

OWNER'S EQUITY

Moksri, Capital 1,328,500

TOTAL LIABILITIES & EQUITY 1,848,500

The kind of presentation above is called the “Report Form”. This way of presenting
the Statement of Financial Position or Balance Sheet arranges assets, liabilities and
capital in a vertical manner. Another way of presenting the Balance Sheet is called
the “Account Form” wherein assets are placed on the left side while the liabilities
and capital are on the right side.

Notice that the sum of total liabilities and equity amounting to ₱1,848,500 is equal
to the total amount of assets. This is exactly the representation of the basic
accounting equation, A = L + C.

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 On the heading, there is a phrase “as of January 31, 2020”. This phrase tells the users
that the balances in the report are cumulative—meaning, from the beginning up to
the present.

The ₱190,000 encircled figure above is the difference of ₱200,000 (machinery) and
₱10,000 (accumulated depreciation). The accumulated depreciation is deducted
from its related asset since it is a contra-asset account.

The capital of ₱1,328,500 shown in the Balance Sheet is actually taken from the
Statement of Changes in Equity.

Illustrative Problem:

Continuing the problem set from Mireio Motor Servicing, you may now prepare the
financial statements using the Adjusted Trial Balance (page 58) as your guide.

MIREIO MOTOR SERVICING

Income Statement
for the month eded January 2020
(in Philippine Peso)

Sales Revenue 45,000

Less: Expenses
Utilities Expense 3,000
Salaries Expense 12,000
Taxes and Licenses 13,000
Supplies Expense 4,000
Depreciation Expense 375 32,375

Net Income 12,625

MIREIO MOTOR SERVICING

Statement of Changes in Equity
for the month eded January 2020
(in Philippine Peso)

M, Capital- January 1 1,000,000

Add: Net Income 12,625
Subtotal 1,012,625

Less: M, Drawing 25,000

M, Capital- January 31 987,625

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 MIREIO MOTOR SERVICING
Statement of Financial Position
as of January 31, 2020
(in Philippine Peso)

ASSETS
Current Assets
Cash 1,254,000
Prepaid Insurance 500,000
Supplies 1,000
Total Current Assets 1,755,000

Non-Current Assets
Machinery 35,000
Accumulated Depreciation- Machinery 250 34,750
Office Equipment 15,000
Accumulated Depreciation- Office Equipment 125 14,875
Total Non-Current Assets 49,625

TOTAL ASSETS 1,804,625

LIABILITIES
Current Liabilities
Accounts Payable 5,000
Salaries Payable 12,000
Total Current Liabilities 17,000

Non-Current Liabilities
Loansd Payable 800,000
Total Non-Current Liabilities 800,000

TOTAL LIABILITIES 817,000

OWNER'S EQUITY
M, Capital 987,625

TOTAL LIABILITIES and EQUITY 1,804,625

References:

HBL Module by Chavez & Malquisto

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