Financial Statements for

a Sole Proprietorship

Accounting Chapter 7
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
CONCEPTS some old, some new
Going Concern
Financial statements are prepared with
the expectation that a business will
remain in operation indefinitely
 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
Other Financial Statements
Look at Best Buy (Appendix B)
11 Yr Financial Highlights
Consolidated Statement of Earnings
Similarto 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
 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
Income Statement Heading
Name of Company
Name of Report
Date of Report

TechKnow Consulting
Income Statement
For the Month Ended August 31, 200x
 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
 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
 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 >= 0 write Net Income in
the Account Title column
If the result < 0 write Net Loss in the
Account Title column
 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
 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
 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)
Balance Sheet Heading

Name of Company
Name of Report
Date of Report

TechKnow Consulting
Balance Sheet
August 31, 200x
 Asset and Liabilities Sections of
the Balance Sheet (pg. 188)
The balance sheet represents the
accounting equation (A=L+OE)
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
 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
 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?
 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
 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
 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
 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
 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