Financial Statements for a Proprietorship

Chapter 7: Financial Statements
for a Proprietorship

I.Adequate Disclosure – the accounting concept applied when financial statements contain all information necessary to understand a business’ financial condition

A.Income Statement – reports financial information over a specific period of time, showing the progress of a business in earning a net income or net loss

B.Balance Sheet – reports financial information on a specific date, showing the condition of business (its financial strength)

II.Income Statement – shows revenue and expenses

Note: The two columns on the income statement are NOT debit and credit columns. The first column is for listing numbers; the second column is for totals.

A.Heading

1.Name of the business

2.Name of the statement (Income Statement)

3.For Month Ended August 31, 2004

B.Revenue Section

1.Use Account Title column for account names

2.Use Income Statement Credit column for amounts

3.More than one source of revenue is common

C.Expenses Section

1.Use Account Title column for account names

2.Use Income Statement Debit column for amounts

D.Net Income/Loss Section

1.Total Revenue – Total Expenses = Net Income

2.Total Expenses > Total Revenue = Net Loss

3.Compare the net income amount with that of the work sheet; they MUST be the same number

E.Component Percentage Analysis Section

1.The percentage relationship between one financial statement item and the total that includes that item

(Expenses as a percent of sales; net income as a percent of sales)

2.Total Expenses Component Percentage

(a)Total Expenses/Total Sales = %

(b)Acceptable → not more than 80%

3.Net Income Component Percentage

(a)Net Income/Total Sales = %

(b)Acceptable → not less than 20%

4.Don’t forget to move the decimal two places to the right after you divide OR just multiply by 100; round to the nearest 10th of a percent (0.1%)

III.Balance Sheet – shows the worth of the business using the accounting equation; all information is obtained from the worksheet

A.Heading

1.Name of the business

2.Name of the statement (Balance Sheet)

3.Date of the statement (August 31, 2007)

B.Assets Section

1.Use Account Title column for account names

2.Use Balance Sheet Debit column for amounts

3.Do not total assets until equities section is prepared; the final totals must appear on the same line

C.Equities Section – Liabilities + Capital (Owner’s Equity)

1.Liabilities

a.Use Account Title column for account names

b.Use Balance Sheet Credit column for amounts

c.Use single ruling to total

2.Owner’s Equity

a.Use Account Title column for account name

b.Capital is NOT copied from the work sheet

c.Determine current capital

Capital + Net Income – Drawing = Current Capital

Capital – Net Loss – Drawing = Current Capital

IV.Electronic Spreadsheets – automates the accounting process using computer software

A.Microsoft Excel

B.“What If” Analysis