Lecture 4
Income Statement:
Cash versus Accrual Accounting
Firm of the Day
2
Goals of Today’s Class
• Better understanding of Revenues and
Expenses
• Better understanding of the Income
Statement
• Better understanding of cash versus
accrual accounting
Review: Debits and Credits
Remember RE is an
Owners’ Equity Account
Retained Earnings
Liability or Owners’ Equity
Asset
(Debit)
+
(Credit)
-
Memorize this for Assets
(Debit)
(Credit)
-
+
Flip it for Liabs + OE
Expenses/Losses
An increase in an Expense
is a decrease in Retained
Earnings. (We decrease
Owners’ Equity accounts
with a debit.)
(Debit)
+
Revenues/Gains
An increase in a
Revenue is an
increase in Retained
Earnings. (We
increase Owners’
Equity accounts with
a credit.)
(Credit)
+
4
Review of Shareholders’ Equity
• What is “contributed capital”?
– The initial investment of owners
– e.g., common stock
• What is “retained earnings”?
– The cumulative net income of the company
that has not been distributed as dividends.
Peeking Ahead -- Contributed Capital: Common Stock
Accounting for initial public issuance of common stock
• Very simple if stock has no par value
1. Debit Cash for the amount of the contribution
2. Credit Common Stock for the amount of the contribution
Example: Sell 2,000 shares of “no par common” for $8 per share
(Debit) Cash $16,000
(Credit) Common Stock $16,000
Peeking Ahead -- Contributed Capital: Common Stock
Accounting for initial public issuance of common stock
• More complicated if stock has a stated par value
1. Debit Cash for the amount of the contribution
2. Credit Common Stock for par value only
3. Credit Other Paid in Capital for the difference (contribution – par value)
Example: Sell 2,000 shares of “$1 par common” for $8 per share
(Debit) Cash $16,000
(Credit) Common Stock (2,000 shs. @ $1 par) $2,000
(Credit) Other Paid in Capital
$14,000
Balance Sheet Equation
At = Lt + SEt
At = Lt + CSt + APICt + REt
At-1 = Lt-1 + CSt-1 + APICt-1 + REt-1
(At - At-1) = (Lt - Lt-1 ) + (CSt - CSt-1 ) + ( APICt - APICt-1 ) + ( REt - REt-1 )
∆A = ∆L + ∆CS + ∆APIC + ∆RE
∆A = ∆L + ∆CS + ∆APIC + Net Income - Dividends
∆A = ∆L + ∆CS + ∆APIC + Revenue - Expenses - Dividends
Income Statement
• Reports Net Income earned by the
business over a period of time as a result
of its profit-directed activities.
• Changes in shareholders’ equity due to
profit-directed activities during an
accounting period.
• Income statement accounts are temporary
accounts.
• Net Income = Revenues – Expenses
Accrual Accounting
Goal is to account for all transactions that economically occurred in the pd.
To document fundamental economics, we employ the accrual method
The accrual method is best contrasted with the cash method of accounting
through an example:
On December 29th, Best Buy sells and delivers an HDTV worth $2,000
Customer purchases the TV using 6 month financing
Best Buy prepares its income statement and balance sheet
on December 31st (this assumes a December fiscal year end)
Did the sale officially occur in the period even though no cash
was received?
Cash basis: No. Accrual Basis: Yes.
Accrual Accounting (continued)
To properly account for periodic income, recognize revenues when earned
and expenses when incurred, even though no cash has been exchanged
This concept is sometimes called the “matching principle”, where revenues
are matched with expenses in the period in which they are incurred
e.g., salaries are often not paid to employees until a week or
two after employees have provided their services
At the end of a period, firms must recognize earned, yet still
unpaid, salary expense to correctly match the expense to the
period in which the services were actually used
To allow for proper accounting of revenues and expenses, we employ
two temporary holding accounts called Receivables and Payables
When revenues are earned, but no cash is received, we record an
increase to a Receivable to reflect cash that we are owed in the future
When expenses are incurred, but no cash is paid, we record an
increase to a Payable to reflect cash that we owe in the future
When and how do we identify and measure
revenues and expenses? Timing
1. Cash Basis
REVENUES with the increase in cash resulting
from the sale of goods or services, and
EXPENSES with the decrease in cash associated
with sales activities.
Period 1
Purchase
inventory for
resale,
on credit,
Cost = $10
Period 2
Period 3
Pay supplier
$10
Sell and deliver
inventory
on credit,
Price = $20
Period 4
Collect $20 from
customer
Calculating Net Income using Cash
Basis Accounting
Period 1
Purchase inventory
for resale, on credit,
Cost = $10
Period 2
Period 3
Period 4
Pay supplier $10
Sell and deliver
inventory on credit,
Price = $20
Collect $20 from
customer
Net Income
=
Revenues
-
Expenses
=
Assets in
-
Assets out
Period 1
0
=
0
-
0
Period 2
-10
=
0
-
10
Period 3
0
=
-
0
Period 4
+20
=
0
20
-
0
What is the downside to Cash Basis
Accounting?
• Reflects the cost and benefit of operating
transactions only when cash payments and cash
receipts occur:
- Delay in recognizing revenues until cash is
received, despite the fact that the store has
performed its primary mission: sale of
inventory.
- Poor matching of the true costs of generating
revenues to the periods in which they are
generated.
2. Accrual Basis - Revenues
• Revenues and expenses are not necessarily
associated with the cash inflows and cash
outflows.
• Identification:
Revenue is the increase in assets (not
necessarily cash) and/or decrease in liabilities
resulting from the principal income
generating activities of the business -- selling
goods or services in the ordinary course of
business.
•
Timing (Recognition):
Revenues: Benefits earned by an entity when the following
criteria are satisfied:
1. The entity has delivered its goods/services to the customer.
2. There is persuasive evidence of an arrangement for customer
payment.
3. The price is fixed or determinable.
4. Collection of cash (or other benefits) is reasonably assured,
though there may still be some uncertainty (uncollectible
accounts, warranties). The degree of uncollectability should be
estimated with reasonable reliability.
•
Revenue is recorded according to the revenue principles,
regardless of when cash is received!
2. Accrual Basis - Expenses
• Revenues and expenses are not necessarily
associated with the cash inflows and cash
outflows.
• Identification
Expense is a decrease in assets (not
necessarily cash) and/or an increase in
liabilities, in a period, for the purpose of
generating revenue in the period
• Timing (matching)
Expenses are recognized
– When the associated revenue is recognized
– Matched to the timing of revenue
– Reported in the income statement in the same period as
the revenue they gave rise to.
• “Matching principle”: recognize costs and/or assets
used as expenses in the period in which they produce
revenue
• Goal of accrual accounting: report inflows of assets
when they are earned, and net them against outflows of
assets used to generate them
Calculating Net Income using Accrual
Basis Accounting
Period 1
Purchase inventory
for resale, on credit,
Cost = $10
Period 2
Period 3
Period 4
Pay supplier $10
Sell and deliver
inventory on credit,
Price = $20
Collect $20 from
customer
Net Income
=
Revenues
-
Expenses
=
Assets in
-
Assets out
Period 1
0
=
0
-
0
Period 2
0
=
0
-
0
Period 3
10
=
20
-
10
Period 4
0
=
-
0
0
Cash vs. Accrual basis of accounting:
Summary
• Cash basis of accounting: Method of
accounting where income is calculated by
recording revenues when cash is received and
expenses when expenditures occur
• Accrual basis of accounting: Method of
accounting where income is calculated by
recording revenues when benefits are earned
and expenses when resources are given up to
produce the revenues (expenses are matched to
revenues)
Please note that…
• The aggregate net income over the life of the business is
the same for accrual and cash basis accounting, and is
equal to cash inflows minus cash outflows. The only
difference is one of timing.
• Cash basis – recognition of revenues and expenses are
associated with the cash flows of the period.
• Accrual basis – timing of cash flows is not necessarily
associated with the recognition of revenues and
expenses.
– Cash may be received/paid before, during, or after revenue and
expense recognition.
Active vs. Passive Journal Entries
Generally, two types of journal entries
Active: generated by an actual transaction on the transaction date
ABC Corp pays $12,000 to prepay 1 year’s rent
(Debit) Prepaid Rent $12,000
(Credit) Cash $12,000
Passive: generated by an end-of-period required adjustment to update
an account for a change due to passage of time
1 month elapses. ABC Corp must adjust the Prepaid Rent account to reflect time
passage.
(Debit) Rent Expense $1,000
(Credit) Prepaid Rent $1,000
Notice the difference:
Active transactions are those made by the firm in the conduct of business
Passive transactions are those made to update the status or balance of
accounts that typically were created previously by active transactions
Active vs. Passive Journal Entries (continued)
If we did not make passive or adjusting entries, our accounts would
stay stuck on the original entry and would therefore be inaccurate
ABC Corp pays $12,000 to prepay 1 year’s rent
Prepaid Rent
(Debit) Prepaid Rent $12,000
(Credit) Cash $12,000
12,000
Without an adjustment as time passes, this
amount would stay here (and on the balance sheet)
forever
Active vs. Passive Journal Entries (continued)
If we did not make passive or adjusting entries, our accounts would
stay stuck on the original entry and would therefore be inaccurate
ABC Corp pays $12,000 to prepay 1 year’s rent
Prepaid Rent
(Debit) Prepaid Rent $12,000
(Credit) Cash $12,000
12,000
1,000
11,000
So at regular time intervals, we make necessary passive adjustments
1 month elapses. ABC Corp must adjust the Prepaid Rent account to reflect time
passage.
(Debit) Rent Expense $1,000
(Credit) Prepaid Rent $1,000
Active vs. Passive Journal Entries (continued)
Typical passive entries include adjustments for:
Interest owed but not yet paid
Interest earned but not yet received
Rent owed but not yet paid
Rent earned but not yet received
Salaries earned but not yet paid
Systematic depreciation of assets through time
Systematic use or expiration of assets through time (like prepaid rent
or drilling rights)
Basic Accounting Flow Example
Balance Sheet Accounts
Self-Smart Corp receives $100,000 cash
from owners to start the business
(Debit) Cash $100,000
(Credit) Contributed Capital $100,000
Self-Smart Corp buys one inventory item
for $20,000 cash
(Debit) Inventory $20,000
(Credit) Cash $20,000
Cash
100,000
40,000
20,000
Contrib Cap
100,000
Inventory
20,000
20,000
Self-Smart Corp sells the inventory item for $40,000 cash
(Debit) Cash $40,000
(Credit) Sales Revenue $40,000
(Debit) Cost of Goods Sold (Expense) $20,000
(Credit) Inventory $20,000
End of Period—Prepare Financial Statements
Income Statement Accounts
Cost of Goods Sold
20,000
Sales Revenue
40,000
Basic Accounting Flow Example
Balance Sheet Accounts
Income Statement
Cash
Revenues
40,000
- Expenses
= Net Income
20,000
100,000
20,000
40,000
20,000
Contrib Cap
100,000
Inventory
20,000
20,000
Income Statement Accounts
Cost of Goods Sold
20,000
Sales Revenue
40,000
Basic Accounting Flow Example
Balance Sheet Accounts
Balance Sheet
Cash
Assets
Cash 120,000
Inv
0
100,000
Liabilities
0
Owners’ Equity
Contrib Cap 100,000
Ret Earns
20,000
40,000
Contrib Cap
100,000
20,000
120,000
100,000
Inventory
20,000
20,000
0
Retained Earns
20,000
40,000
20,000
Income Statement Accounts
Cost of Goods Sold
20,000
0
Sales Revenue
20,000 40,000 40,000
0
An Extended Example
Balance Sheet
Income Statement
Assets
Liabilities
Revenues/Gains
Cash
100,000
Expenses/Losses
Equity
Common
100,000
Jan 1: Received $100,000 in exchange for 10,000 shares of common stock
(Debit) Cash $100,000
(Credit) Common Stock $100,000
Balance Sheet
Assets
Income Statement
Liabilities
Revenues/Gains
Cash
100,000
Expenses/Losses
Equity
Common
100,000
Jan 1: Hired warehouse/marketing supervisor at salary of $2,000 per month (paid on 7 th of
each month after actual work month has elapsed)
No journal entry since there was no actual transaction (no services performed by new employee yet)
Balance Sheet
Assets
Cash
100,000
4,500
Income Statement
Liabilities
Revenues/Gains
Prepaid Rent
4,500
Expenses/Losses
Equity
Common
100,000
Jan 1: Prepaid $4,500 to landlord for 3 months rent on warehouse
(Debit) Prepaid Rent $4,500
(Credit) Cash
$4,500
Balance Sheet
Assets
Cash
100,000
4,500
Income Statement
Liabilities
Prepaid Rent
4,500
Revenues/Gains
Accts Paybl
55,000
Inventory
55,000
Expenses/Losses
Equity
Common
100,000
Jan 10: Purchased $55,000 (10,000 units) of inventory on credit. 1% discount if paid within 10 days
(Debit) Inventory $55,000
(Credit) Accounts Payable $55,000
Balance Sheet
Income Statement
Assets
Cash
100,000
4,500
54,450
Liabilities
Prepaid Rent
4,500
Accts Paybl
55,000
Revenues/Gains
Discount
55,000
550
Inventory
55,000
Expenses/Losses
Equity
Common
100,000
Jan 19: Paid $54,450 to inventory vendor
(Debit) Accounts Payable $55,000
(Credit) Cash
(Credit) Gain on Discount
$54,450
$550
Balance Sheet
Assets
Cash
100,000
4,500
54,450
Inventory
55,000
11,000
Income Statement
Liabilities
Prepaid Rent
4,500
Accts Paybl
55,000
Revenues/Gains
Sales
55,000
Discount
26,000
550
Accts Recvbl
26,000
Expenses/Losses
COGS
Equity
11,000
Common
100,000
Jan 22: Sold 2,000 units of inventory on credit for $26,000. Collect 2% penalty if not paid in 15 days
(Debit) Accounts Receivable $26,000
(Credit) Sales Revenue $26,000
(Debit) Cost of Goods Sold $11,000
(Credit) Inventory
$11,000
Balance Sheet
Assets
Cash
100,000
4,500
54,450
Inventory
55,000
11,000
Income Statement
Liabilities
Prepaid Rent
4,500
Accts Paybl
55,000
Revenues/Gains
Sales
55,000
Discount
26,000
550
Accts Recvbl
26,000
Expenses/Losses
COGS
Equity
11,000
Common
100,000
Jan 30: We are done with active January entries. Now we need to passively adjust some accounts before
we prepare the January balance sheet and income statement.
Balance Sheet
Assets
Cash
100,000
4,500
54,450
Inventory
55,000
11,000
Income Statement
Liabilities
Prepaid Rent
4,500
1,500
Revenues/Gains
Accts Paybl
55,000
Sales
55,000
Discount
26,000
550
Accts Recvbl
26,000
Expenses/Losses
COGS
Equity
11,000
Common
100,000
Jan 30: Passive adjustment to reflect prepaid rent that has been used up
(Debit) Rent Expense $1,500
(Credit) Prepaid Rent $1,500
Rent Exp
1,500
Balance Sheet
Assets
Cash
100,000
4,500
54,450
Inventory
55,000
11,000
Income Statement
Liabilities
Prepaid Rent
4,500
1,500
Accts Paybl
55,000
Revenues/Gains
Sal Paybl
55,000
Sales
2,000
Discount
26,000
550
Accts Recvbl
26,000
Expenses/Losses
COGS
Equity
11,000
Rent Exp
1,500
Common
100,000
Sal Exp
2,000
Jan 30: Passive adjustment to reflect the liability you now owe your employee for the work performed
(Debit) Salary Expense $2,000
(Credit) Salary Payable $2,000
Balance Sheet
Income Statement
Assets
Cash
100,000
4,500
54,450
Liabilities
Prepaid Rent
4,500
3,000
1,500
41,050
Inventory
55,000
44,000
11,000
Accts Paybl
55,000
Revenues/Gains
Sal Paybl
55,000
Sales
2,000
Discount
26,000
550
0
Accts Recvbl
26,000
Expenses/Losses
COGS
Equity
11,000
Common
100,000
Sal Exp
2,000
Jan 30: Now we can prepare the financial statements
Rent Exp
1,500
Balance Sheet
Income Statement
Assets
Cash
41,050
Inventory
44,000
Liabilities
Prepaid Rent
3,000
Accts Paybl
Revenues/Gains
Sal Paybl
0
Sales
2,000
Discount
26,000
550
Accts Recvbl
26,000
Expenses/Losses
COGS
Equity
11,000
Common
100,000
Sal Exp
2,000
Jan 30: Now we can prepare the financial statements
Rent Exp
1,500
Income
Balance
Statement
Sheet
Income Statement
Assets
Liabilities
Sales
26,000
Cash
PrepaidDiscount
Rent
Accts Paybl
Sal Paybl
+ Gain from
550
41,050
3,000
0
= Total Revenues and Gains 26,550
11,000
- Cost of Goods Sold
1,500
- Rent Expense
Inventory
Accts Recvbl
2,000
Salary26,000
Expense
44,000 12,050
= Net Income
Revenues/Gains
Sales
2,000
26,000
11,000
Common
100,000
Sal Exp
2,000
Jan 30: Now we can prepare the financial statements
550
Expenses/Losses
COGS
Equity
Discount
Rent Exp
1,500
Balance Sheet
Income Statement
Assets
Cash
41,050
Inventory
44,000
Liabilities
Prepaid Rent
3,000
Accts Paybl
Revenues/Gains
Sal Paybl
0
Sales
2,000
Discount
26,000
550
Accts Recvbl
26,000
Expenses/Losses
COGS
11,000
Equity
Common
Rent Exp
1,500
Ret Earns
100,000
Sal Exp
2,000
Jan 30: Now we can prepare the financial statements
After the income statement is prepared, we transfer Income Statement accounts into Retained
Earnings to allow for balance sheet preparation
Balance Sheet
Income Statement
Assets
Cash
41,050
Prepaid Rent
3,000
Inventory
44,000
Liabilities
Accts Paybl
Revenues/Gains
Sal Paybl
0
2,000
Sales
26,000
26,000
Discount
550
0
550
0
Accts Recvbl
26,000
Expenses/Losses
COGS
11,000
Equity
Common
Ret Earns
100,000
26,550
Sal Exp
2,000
Jan 30: Close Revenue Accounts into Retained Earnings
(Debit) Sales $26,000
(Debit) Discount $550
(Credit) Retained Earnings 26,550
Rent Exp
1,500
Balance Sheet
Income Statement
Assets
Cash
41,050
Inventory
44,000
Liabilities
Prepaid Rent
3,000
Accts Paybl
Revenues/Gains
Sal Paybl
0
Sales
2,000
Discount
0
0
Accts Recvbl
26,000
Expenses/Losses
COGS
11,000
Equity
Common
100,000
Ret Earns
14,500
26,550
12,050
11,000
0
Rent Exp
1,500
1,500
0
Sal Exp
2,000
2,000
0
Jan 30: Close Expense Accounts into Retained Earnings (Debit) Retained Earnings $14,500
(Credit) Cost of Goods Sold $11,000
(Credit) Salary Expense
$ 2,000
(Credit) Rent Expense
$ 1,500
Balance Sheet
Income Statement
Assets
Cash
41,050
Inventory
44,000
Liabilities
Prepaid Rent
3,000
Accts Paybl
0
Revenues/Gains
Sal Paybl
Sales
2,000
Discount
0
0
Accts Recvbl
26,000
Expenses/Losses
COGS
0
Equity
Common
100,000
Ret Earns
12,050
Sal Exp
0
Jan 30: Now the Balance Sheet is effectively already prepared
Total Assets = $114,050
Total Liabs + Equity = $114,050
Rent Exp
0
Balance Sheet
Income
BalanceStatement
Sheet
Assets
Cash
41,050
Inventory
44,000
Liabilities
Prepaid Rent
3,000
Accts Paybl
0
Assets
Sal Paybl
2,000
Accts Recvbl
Revenues/Gains
Cash
Sales
Prep Rent
0
Inventory
Accts Rec
Total Assets
41,050
Discount
3,000
0
44,000
26,000
114,050
Liabilities + Owners’ Equity
26,000
Expenses/Losses0
Accts Pay
Salaries Pay
2,000
Common
100,000
COGS Stock Rent
Exp
Retained
Earns 0 12,050
0
Total Liabs + OE
114,050
Equity
Common
100,000
Ret Earns
12,050
Sal Exp
0
Jan 30: Now the Balance Sheet is effectively already prepared
Balance Sheet
Income Statement
Assets
Cash
41,050
Inventory
44,000
Liabilities
Prepaid Rent
3,000
Accts Paybl
0
Revenues/Gains
Sal Paybl
Sales
2,000
Discount
0
0
Accts Recvbl
26,000
Expenses/Losses
COGS
0
Equity
Common
100,000
Rent Exp
0
Ret Earns
12,050
Sal Exp
0
February: Now we continue to build off of these accounts as the business continues
February: Notice the Income Statement accounts are all “clean” to enable a new cumulation period
Balance Sheet
Income Statement
Assets
Cash
41,050
39,000
Prepaid Rent
3,000
Inventory
44,000
Liabilities
16,500
Accts Paybl
0
Revenues/Gains
Sal Paybl
Sales
2,000
Discount
0
39,000
0
Accts Recvbl
26,000
Expenses/Losses
COGS
0
Equity
Rent Exp
0
16,500
Common
100,000
Ret Earns
12,050
Sal Exp
0
February 3: Sold 3,000 units of inventory for $39,000 cash
(Debit) Cash $39,000
(Credit) Sales Revenue $39,000
(Debit) Cost of Goods Sold $16,500
(Credit) Inventory
$16,500
Balance Sheet
Income Statement
Assets
Cash
41,050
39,000
Prepaid Rent
3,000
Accts Paybl
Revenues/Gains
Sal Paybl
0
Sales
2,000
16,500
Discount
0
39,000
2,000
Inventory
44,000
Liabilities
0
Accts Recvbl
26,000
Expenses/Losses
COGS
0
Equity
Rent Exp
0
16,500
Common
Ret Earns
100,000
12,050
Sal Exp
0
February 7: Paid $2,000 cash for radio advertisements
(Debit) Advertising Expense $2,000
(Credit) Cash
$2,000
Adv Exp
2,000
Balance Sheet
Income Statement
Assets
Cash
41,050
39,000
Prepaid Rent
3,000
Accts Paybl
0
16,500
Revenues/Gains
Sal Paybl
2,000
2,000
2,000
Inventory
44,000
Liabilities
Sales
2,000
Discount
0
39,000
0
Accts Recvbl
26,000
Expenses/Losses
COGS
0
Equity
Rent Exp
0
16,500
Common
100,000
Ret Earns
12,050
Sal Exp
0
February 7: Paid $2,000 salary to employee
(Debit) Salary Payable $2,000
(Credit) Cash
$2,000
Adv Exp
2,000
Balance Sheet
Income Statement
Assets
Cash
41,050
39,000
26,520
Liabilities
Prepaid Rent
3,000
Accts Paybl
0
Revenues/Gains
Sal Paybl
2,000
2,000
2,000
Sales
2,000
Discount
0
39,000
0
Fee Rev
Inventory
44,000
16,500
520
Accts Recvbl
26,000
26,000
Expenses/Losses
COGS
0
Equity
Rent Exp
0
16,500
Common
100,000
Ret Earns
12,050
Sal Exp
0
February 13: Received payment of $26,520 from Jan 22nd customer
(Debit) Cash $26,520
(Credit) Accounts Receivable $26,000
(Credit) Collected Fee Revenue $520
Adv Exp
2,000
Balance Sheet
Income Statement
Assets
Cash
41,050
39,000
26,520
Liabilities
Prepaid Rent
3,000
Accts Paybl
0
Revenues/Gains
Sal Paybl
2,000
2,000
2,000
Sales
2,000
Discount
0
39,000
0
Fee Rev
Inventory
44,000
16,500
520
Accts Recvbl
26,000
26,000
Expenses/Losses
COGS
0
Equity
Rent Exp
0
16,500
Common
100,000
Ret Earns
12,050
Sal Exp
0
Adv Exp
2,000
Feb 29: We are done with active February entries. Now we need to passively adjust some accounts
before we prepare the February balance sheet and income statement.
Balance Sheet
Income Statement
Assets
Cash
41,050
39,000
26,520
Liabilities
Prepaid Rent
3,000
2,000
2,000
1,500
Accts Paybl
0
Revenues/Gains
Sal Paybl
2,000
Sales
2,000
Discount
0
39,000
0
Fee Rev
Inventory
44,000
16,500
520
Accts Recvbl
26,000
26,000
Expenses/Losses
COGS
0
Equity
16,500
Common
Rent Exp
0
1,500
Ret Earns
100,000
12,050
Sal Exp
0
Feb 29: Passive adjustment to reflect prepaid rent that has been used up
(Debit) Rent Expense $1,500
(Credit) Prepaid Rent $1,500
Adv Exp
2,000
Balance Sheet
Income Statement
Assets
Cash
41,050
39,000
26,520
Liabilities
Prepaid Rent
3,000
2,000
2,000
1,500
Accts Paybl
0
Revenues/Gains
Sal Paybl
2,000
Sales
2,000
Discount
0
39,000
2,000
0
Fee Rev
Inventory
44,000
16,500
520
Accts Recvbl
26,000
26,000
Expenses/Losses
COGS
0
Equity
16,500
Common
Rent Exp
0
1,500
Ret Earns
100,000
12,050
Sal Exp
0
2,000
Adv Exp
2,000
Feb 29: Passive adjustment to reflect the liability you now owe your employee for the work performed
(Debit) Salary Expense $2,000
(Credit) Salary Payable $2,000
Balance Sheet
Income Statement
Assets
Cash
41,050
39,000
26,520
102,570
27,500
Prepaid Rent
3,000
2,000
2,000
Inventory
44,000
Liabilities
16,500
1,500
1,500
Accts Paybl
0
Revenues/Gains
Sal Paybl
2,000
Sales
2,000
2,000
2,000
0
39,000
0
Fee Rev
520
Accts Recvbl
26,000
Discount
26,000
Expenses/Losses
0
COGS
0
Equity
16,500
Common
Rent Exp
0
1,500
Ret Earns
100,000
12,050
Sal Exp
0
2,000
Feb 29: Now we can prepare the financial statements
Adv Exp
2,000
Balance Sheet
Income Statement
Assets
Cash
102,570
Liabilities
Prepaid Rent
1,500
Accts Paybl
0
Revenues/Gains
Sal Paybl
Sales
2,000
Discount
0
39,000
0
Fee Rev
Inventory
27,500
520
Accts Recvbl
0
Expenses/Losses
COGS
0
Equity
16,500
Common
100,000
0
1,500
Ret Earns
12,050
Sal Exp
0
2,000
Feb 29: I’ll leave it up to you to:
Rent Exp
Adv Exp
2,000
(1) Prepare the Income Statement
(2) Close the Revenue and Expense accounts to Ret Earns
(3) Prepare the Balance Sheet