LESSON 7-1

Preparing an
Income Statement
http://www.youtube.com/watch?v=Z7C4cz2Hk
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ACCOUNTING
January 30, 2014
 Welcome to Chapter 7
 Chapter 7 Covers the preparation of an income
statement and a balance sheet for a
proprietorship.

 Not only is statement preparation covered but

also the financial statement analysis of these
statements (in simplest form).
 American Eagle Outfitters
Accounting in the Real World
 Answer the critical
Thinking questions that
follow.

Warm Up
 Internet Activity
 Chose two companies in the same industry. Go
to the homepage for each company and search for
its most current financial statements.

 Answer the questions that follow.

 HINT: Total expenses / Total Revenue
 Net Income (loss) / total revenue
 Chapter 7-1
Reporting Financial Information
 Adequate Disclosure
› Applied when financial statements
contain all information necessary to
understand a business’s financial
condition
› Without it, financial information would
be incomplete.
 Objectives
 Define Accounting Terms related to financial
statements for a service business organized as a
proprietorship.
 Identify accounting concepts and practices
related to preparation of an income statement.
 Prepare an income statement and analyze an
income statement using component percentages.
 Question for YOU?
 How many of you would work for a year, not
knowing how much you were going to make
during that year?

Compare this with a company that waits until the

end of the year to determine how much the
company “made” during the year. This helps
explain why a business would prepare an income
statement every month-even if it is not required
to do so.
 Terminology 7-1
 Component percentage: the percentage
relationship between one financial statement item
and the total that includes that item. (p. 184)

 Stakeholders: any persons or groups who will be

affected by an action (p. 181)
 Important!!!
 Income Statement reports information over a
specific period of time.
 The date used to prepare the income statement is
obtained from the Income statement columns of a
work sheet.
 Remember that the heading of most financial
statements answers the questions: WHO?
WHAT? And WHEN?
INCOME STATEMENT page 182
INFORMATION ON A WORK SHEET

LESSON 7-1 10
 HEADING OF AN INCOME page 182

STATEMENT
1

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.

LESSON 7-1 11
 Remember Revenue and
Expenses?
 Revenue an increase in owner’s equity
resulting from the operation of a business. (p. 14)

 Expense a decrease in owner’s equity resulting

from the operation of a business. (p. 15)
 Income Statement has 4
sections….
 Heading
 Revenue
 Expenses
 Net Income or Loss

 NOTE: the two columns on the income statement

are not debit and credit columns.
 Before we look….
 The account titles are indented under section
titles to make the sections titles easier to read

 The account balances are listed in the first

column, totals in the second column.
 REVENUE, EXPENSES, AND NET
INCOME SECTIONS OF AN INCOME page 183
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
LESSON 7-1 15
COMPONENT PERCENTAGE ANALYSISpage 184
OF AN INCOME STATEMENT

LESSON 7-1 16
 Character Counts
 Try Aplia(Work Together and On Your Own)

 Character Counts
Key Term-Stakeholders……
 Question for you….
 Can you name a business that might have more
than one source of revenue from services?

 Example: A music store might offer lessons and

repairs on instruments.
 REMINDER!
 The data for the income statement is found on the
work sheet.

 Today, we will focus on how two sources of

revenue can be documented on an income
statement but it must be listed separately, similar
to the way that each expense is listed.
 What Happens when Total
Expenses Exceed Total Revenue?

 There is a NET LOSS.

 Let’s take a look!!!!!

 INCOME STATEMENT WITH TWO SOURCES OF
page 185
REVENUE AND A NET LOSS

5 Total Revenue

Revenue 1
Account titles 2 3 Revenue amounts

4 Total of revenue

Net Loss 6

7 Record Net Loss

LESSON 7-1 21
 TERMS REVIEW page 186

 stakeholders
 component percentage

 Component percentage: the percentage

relationship between one financial statement item
and the total that includes that item. (p. 184)

 Stakeholders: any persons or groups who will be

affected by an action (p. 181)
LESSON 7-1 22
 Your Assignment
 Aplia Application Problem 7-1
 Math Work Sheet
 Part A & Part B.
 On the bottom of the worksheet answer the
following questions
 LESSON 7-2
Balance Sheet Information on a
Work Sheet
 Objective
 Identify accounting concept and practices
related to the preparation of a balance sheet
for a service business organized as a
proprietorship.

 Prepare a Balance Sheet for a service business

organized as a proprietorship.
Do you Remember the Accounting
Equation?
 Do you Remember the Accounting
Equation?
 ASSETS = LIABILITIES + OWNERS EQUITY

 The Balance Sheet uses the same format as the

accounting equation.
 This part of the chapter will discuss preparing a
balance sheet using data on the work sheet.
 Before we look at a Balance
Sheet…
 Balance Sheet Reports information for a
SPECIFIC date.
 The data used to prepare the balance sheet
can be obtained from the balance sheet
columns of the worksheet.
 The heading of most financial statements
answers the questions: WHO? WHAT &
WHEN?
 HEADING OF A BALANCE page 187

SHEET
1

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.

LESSON 7-2 29
 What’s on a Balance Sheet?
 Assets
 Liabilities
 Owner’s Equity
 BALANCE SHEET page 187

The Information
needed to
prepare the
assets section is
obtained from
the Balance
Sheet Debit
Column.

LESSON 7-2 31
 BALANCE SHEET page 187

The Information
needed to
prepare the
liabilities section
is obtained from
the Balance
Sheet Credit
Column.

LESSON 7-2 32
 ASSETS AND LIABILITIES
page 188
SECTIONS OF A BALANCE SHEET
Liability amounts 6

Account titles 5

1 Assets 4 Liabilities

8 Total Liabilities

Single line 7
2 Account titles
Total of liabilities 9
3 Asset amounts

LESSON 7-2 33
 Lets Stop Here a Moment.
 Read “Case for Critical Thinking” on page
197 and answer the question that follow. You
can use the back of the work sheet provided to
you.

 Then Try Applied Communication on the

same page and write down your advice to your
new assistant.
 Owner’s Equity
 Owners Equity-the amount remaining after the
value of all liabilities is subtracted from the value
of all assets

 The information needed to prepare the owner’s

equity section of a balance sheet is obtained from
the Balance Sheet columns of the work sheet
 How to calculate the new capital
balance…
 Capital Account Balance-Net Loss-Drawing
Account Balance=Current Capital (Page 189)

 Lets look at the ten steps for preparing the

owner’s equity section of a balance sheet.
 OWNER’S EQUITY SECTION page 189

1
OF A BALANCE
Owner’s Equity
SHEET
4 Single line
2 Account title Capital amount 3

Total of assets 6

5 Total Assets 7 Total Liab. and

Owner’s Eq.

Compare totals 9 10 Double lines

Total of Liabilities and Owner’s Equity 8

LESSON 7-2 37
 Let’s look deeper…
 The Owner’s Equity section of a balance sheet
can show more detail than that shown on a
balance sheet.

 A business may choose to show more details in

the owner’s equity section.

 There are 9 steps used to prepare the owner’s

equity section reported in detail on a balance
sheet.
 OWNER’S EQUITY REPORTED IN
DETAIL ON A BALANCE SHEET page 190
3 Net Income Current capital amount 8

1 Beginning capital Difference 6

Beginning capital amount 2

7 Ending capital 5 Single line

4 Drawing 9 Total Liabilities and Owner’s Equity

LESSON 7-2 39
 Today…
 Aplia 7-2 Work Together and On Your Own.
 Chapter 7 Study Guide
 Extra Study Tools AND
 Take Online Tutorial Quiz
› www.c21accounting.com
 Exit Ticket
 List the four sections on a balance sheet.

 What is the formula for calculating current

capital?