Preparing an Income

Statement
Chapter 7
Objectives

 Covers the Preparation of an Income Statement and

Balance Sheet for a proprietorship.
 Financial Statement Analysis of these statements.
Terms
 Stakeholders
 Any persons or groups who will be affected by an action
 Component Percentage
 The percentage relationship between one financial
statement item and the total that includes that item.
 Adequate Disclosure
 Accounting Concept is applied when financial
statements contain all information necessary to
understand a business’s financial condition.
Reporting Financial Information
 We take information from our general ledger and
help summarize, organize, and report it to the
owners and managers.
 Accounting Concept – Adequate Disclosure
 TechKnow prepares two financial statements
 Income Statement and Balance Sheet
 Accounting Concept Going Concern
 When financial statements are prepared with the
expectation that a business will remain in operation
indefinitely.
Income Statement Information on a
Work Sheet
Income Statement
7 Single line

Revenue 1
2 Account title 3 Revenue amount
Expenses 4

Account titles 5 6 Expense amount

Total expenses 8 9 Total of expenses

12 Net Income
11 Single line
14 Double lines
13 Record net income
10 Calculate net income
Component Percentage Analysis
 Revenue reported on an income statement is
compared to two components:
1. Total Expenses
2. Net Income
 In making decisions a manager analyzes
relationships between these two components.
 The percentage relationship between one
financial statement item and the total that
includes that item is called a component
percentages.
Acceptable Component Percentages

 How do you know what is acceptable?

 Variousindustry organizations public average
percentages for similar businesses.
 Inthe future, TechKnow will also utilize previous fiscal
periods as comparisons.
Total Expenses Component Percentages

 An acceptable total expenses component percentage is

not more than 55%
 TechKnow’s is 41.1%
 Is it acceptable?
 Yes because it is less than 55%

Total  Total = Total Expenses Component

Expenses Sales Percentages
$1,466  $3,565 = 41.1%
Net Income Component Percentage

 Acceptable Net Income CP is not less than 45%

 TechKnow’s is 58.9%
 Is it acceptable?
 Yes, it is greater than 45% and is acceptable.
Net Income  Total = Total Expenses Component
Sales Percentages
$2,099  $3,565 = 58.9%
Component Percentage Analysis
Multiple Revenue

 TechKnow receives revenue from only on source

 HighNote receives revenue from two sources, the
sale of services for music lessons and services to
repair musical instruments.
 Business owner wants to know revenue from each
source.
 Two revenue accounts are used.
 Sales-Lessons and Sales-Repairs.
Company Ex. Of Two Revenue Sources
5 Total Revenue

Revenue 1
Account titles 2 3 Revenue amounts

4 Total of revenue

Net Loss 6

7 Record Net Loss

Audit Your Understanding
 List the four sections of an income statement.
1. Heading
2. Revenue
3. Expenses
4. Net income or net loss
 What is the formula for calculating the total
expenses component percentage?
 Total Expenses  Total Sales = Total Expenses
 What is the formula for calculating the net
income component percentage?
 Net Income Total Sales = Net Income
 7.2 Balance Sheet
information on a Work
Sheet
 LESSON 7-2
Balance Sheet Information on a Work Sheet
Objectives

 How to prepare a balance sheet using data from

the work sheet
Balance Sheet

 Reports financial information on a specific date,

indicating the financial condition of a business.
 Financial condition = Financial Strength
 What makes a company strong?
 Fewer liabilities and adequate assets
 You want your assets to be greater than your
liabilities
Balance Sheet

 Information about assets, liabilities, and owner’s equity is

in the general ledger accounts or from a work sheet.
 The information is easier to use if reported in an
organized manner like a balance sheet.
 Found in two places on the work sheet
 Account Titles are obtained from the work sheet’s Account Title
Column’s
 Account balances are obtained from the work sheet’s Balance
Sheet columns.
Balance Sheet

1. Heading
 Answer’s the questions Who? What? and When?
2. Assets
3. Liabilities
4. Owner’s Equity
BALANCE SHEET

21
HEADING OF A BALANCE SHEET

1. 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.
ASSETS AND LIABILITIES
SECTIONS OF A BALANCE SHEET
Calculating Capital

 CapitalAccount Balance + Net Income - Drawing

= Current Capital
 CapitalAccount Balance – Net Loss – Drawing
Account Balance = Current Capital

 OR use your formula! Assets = Liab. – OE

 Just subtract your Liab. From Assets
OWNER’S EQUITY SECTION OF A BALANCE
SHEET

25
OWNER’S EQUITY REPORTED IN DETAIL
ON A BALANCE SHEET
Audit Your Understanding

 List the four sections on a balance sheet.

 What is the formula for calculating current capital?