Financial Statements for a Sole Proprietorship

1
Financial Statements for a Sole Proprietorship

• Accounting Chapter 7

2
CONCEPTS 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

3
CONCEPTS some old, some new

• Going Concern
• Financial statements are prepared with the
  expectation that a business will remain in
  operation indefinitely

4
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

5
Other 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
  Shareholders Equity
• Stock issues

6
Income 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

7
Income Statement Heading

• Name of Company
• Name of Report
• Date of Report
• TechKnow Consulting
• Income Statement
• For the Month Ended August 31, 200x

8
Preparing 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

9
Preparing 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

10
Preparing 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 gt 0 write Net Income in the
  Account Title column
• If the result lt 0 write Net Loss in the Account
  Title column

11
Preparing 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

12
Component 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

13
Balance 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)
• Owners Equity (what we are worth)

14
Balance Sheet Heading

• Name of Company
• Name of Report
• Date of Report
• TechKnow Consulting
• Balance Sheet
• August 31, 200x

15
Asset and Liabilities Sections of the Balance
Sheet (pg. 188)

• The balance sheet represents the accounting
  equation (ALOE)
• 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

16
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

17
Owners Equity Section (pg 189)

• Center the title Owners 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?

18
Calculating 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

19
Back to Owners 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

20
Finding 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

21
Detailed OE Section (pg 190)

• Title the Owners 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

22
Detailed 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