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ACCOUNTING
January 30, 2014

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).
Answer the critical
Thinking questions that
follow.

Warm Up

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

Adequate Disclosure
› Applied when financial
statements contain all
information necessary to
understand a business’s
financial condition
› Without it, financial information
would be incomplete.
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.


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 montheven if it is not required to do so.

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)
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?

page 182
LESSON 7-1
10
page 182
1
2
3
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

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)
Heading
 Revenue
 Expenses
 Net Income or Loss


NOTE: the two columns on the income
statement are not debit and credit
columns.

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.
page 183
7
Revenue
1
Expenses
4
Account titles
5
Total expenses
8
2
Single line
3
Account title
6
Revenue amount
Expense amount
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
page 184
LESSON 7-1
16

Try Aplia(Work Together and On Your
Own)

Character Counts
Key Term-Stakeholders……

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.

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.

There is a NET LOSS.

Let’s take a look!!!!!
page 185
5
Revenue
Account titles
Total Revenue
1
2
3
Revenue amounts
4
Net Loss
6
7
LESSON 7-1
Record Net Loss
21
Total of revenue
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
Aplia Application Problem 7-1
 Math Work Sheet



Part A & Part B.
On the bottom of the worksheet answer
the following questions

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.

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.

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?

page 187
1
2
3
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
Assets
 Liabilities
 Owner’s Equity

page 187
The
Information
needed to
prepare the
assets section
is obtained
from the
Balance Sheet
Debit Column.
LESSON 7-2
31
page 187
The
Information
needed to
prepare the
liabilities
section is
obtained from
the Balance
Sheet Credit
Column.
LESSON 7-2
32
page 188
Liability amounts 6
Account titles 5
1
Assets
4
Liabilities
Total Liabilities
8
Single line
2
Account titles
3
Asset amounts
LESSON 7-2
33
7
Total of liabilities
9

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.

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

Capital Account Balance-Net LossDrawing Account Balance=Current
Capital (Page 189)

Lets look at the ten steps for preparing
the owner’s equity section of a balance
sheet.
page 189
1
Owner’s Equity
2
Account title
Total of assets
5
4
Single line
Capital amount 3
6
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

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.
page 190
3
Net Income
1
Current capital amount 8
Beginning capital
Difference 6
Beginning capital amount 2
7
4
Ending capital
Drawing
5
9
Single line
Total Liabilities and Owner’s Equity
LESSON 7-2
39
Aplia 7-2 Work Together and On Your
Own.
 Chapter 7 Study Guide
 Extra Study Tools AND
 Take Online Tutorial Quiz

› www.c21accounting.com

List the four sections on a balance sheet.

What is the formula for calculating
current capital?