Income statement— Shows the
business income minus expenses.
Also called a profit and loss report.
Useful for calculating taxes owed,
or for loan application, and when
looking to improve business
operations.
Balance
Sheet
+
Income
Statement= Statement of Cash
Flow (Important to check monthly
so one would know what
operational cost should be
reduced.)

The income statement shows




All of the income or money
generated for a particular
time period.
The total cost of goods sold
Any business expenses for
the reporting period.
Resulting profit or loss
Cost of Goods Sold (COGS) is
automatically calculated if you sell
inventory
products.
Many
businesses don’t need to track
COGS.
Money you spend to buy assets,
pay liabilities, or distribute to the
owners (equity) are not considered
expenses.
Net Income (Profit) summarizes all
of the activities from the income
and expense account. It appears on
the Balance Sheet under equity
because the owners are entitled to
the business’s profit.
The financial statement is used to
show where the company is. It
shows how much the owner has
made.
Statement of Equity— changes in
an owner’s total equity during the
reporting period. This statement
shows the owner’s capital at the
beginning of the reporting period,
the changes that have affected the
capital, and the resulting capital at
the end of accounting period.
Economic Entity assumption
The business is a separate entity,
so the activities of a business must
be kept separate from any other
financial activities of its business
owners.
Revenue Recognition Principle

Ex. A business owner should keep
personal expenses and business
expenses separately.
The Reliability Assumption
This
assumption
makes
it
mandatory for companies to
record
only
accounting
transactions that can be verified
through
invoices,
billing
statements, receipts, and bank
statements.
Ex. If you lost the receipt of
something
you
bought,
bookkeepers cannot record it in
the books.
Full Disclosure Principle
All information that is relative to
the business and is important to a
lender or investor has to be
disclosed in financial statements or
in the notes of the statements.
Ex. _______________________
Periodicity Assumption
Period Assumption)

(Time
Organization can report its
financial results within a
certain designated period
of time. This typically
means that an entity
consistently reports its
result and cash flows on a
monthly, quarterly, or
annual basis.
Owners cannot wait until
the end of the year to
know whether or not the
business can afford a new
equipment.
Requires that revenues are
recognized on the income
statement in the period
when
realized
and
earned— not necessarily
when cash is received.
The Matching Principle directs that
a company to report an expense on
its income statement in the period
in which the related revenues are
earned.

Match how income earned
and expenses incurred
related.
Cash Basis Accounting Method—
An accounting method in which
revenue is recognized when
payment is received, and expenses
are recognized when paid out.
Pros:



Simple to use
Present Oriented
Lesser taxes
Cons


Does not provide a full
picture of the business
activity
Not suitable for business
that gives credit
Accrual Method— An accounting
method in which revenues are
reported when they are earned
and expenses are reported when
they are incurred.

Realistic to what the
business is. One can have
bills that are outstanding
and you can have invoices
that are outstanding.
Pros:

Provides a fuller picture of
the company’s financial
condition
convert to cash and expect to do so
within the next 12 months.
Ex. Cash, Accounts Receivable,
Inventory; Raw Material, Finished
Goods, Prepaid Rent.
Accounts Receivable— Money
others owe you, like a customer
you have invoiced.
Prepaid Rent- Prepaid expenses,
like rent or annual subscriptions,
are considered current assets.
Noncurrent Asset (LONG TERM
ASSET)— Things your company
owns that you expect to have for
more than 12 months.
Example: Equipment, Vehicle,
Accumulated
Depreciation,
Furniture, Computers
Con

Complicated and requires
more time and resources.
Hybrid Method Accounting- A
combination of the cash basis and
accrual method of accounting.



Cash basis method to track
things like revenue and
expenses
Accrual
method
for
inventory
Can’t switch. Must be
consistent.
Example: I can use cash basis
accounting to track income from
mowing lawns and I can use accrual
method for selling garden gnomes.

For tax purposes, business
owner can use cash basis
method to report to the
IRS.
ASSETS
Current Assets— Things your
company owns that you can easily
Vehicles— vehicles, equipment,
furniture, buildings, or land are all
example of noncurrent assets.
Accumulated Depreciation— Some
long-term
assets
will
be
depreciated, that is, they’ll lose
value each year over their useful
life. We keep track of the
accumulated depreciation in a
contra asset account.
Different asset types; Tangible vs.
Intangible Assets
Tangible— Generally physical
asset, such as inventory, vehicle, or
a building.
Intangible— not physical. Example
would be a copyright, patent, or
brand recognition. Intangible asset
does not appear on the balance
sheet but do add value to the
business. All else being equal, a
buyer will pay more for a company
that holds patent for its technology
than a company that does not.
Accrual method of accounting for
prepaid expenses. Then, put the
transaction on prepaid balance
sheet account.
Once you received the good or
service, reduce your prepaid
balance sheet account with a credit
and increase your expense with a
debit. This asset accrues, or
accumulate, over a period of time
using this method of transaction.
This system assumes that you pay
for the product or service in
advance, receiving it at a later date.
Prepaid Expense- Subscription or
payment ahead of time. Prepaid
expense accounting are expenses
that are current asset. They’re
asset because you benefit from
them in the future.
Prepaid expense ex— Prepaid
Rent, Prepaid Insurance, Prepaid
legal retainer fee, healthcare
coverage, property taxes, and
maintenance service.
Reaping the benefit of prepaid
expenses— Some business offers
discount
for
prepayments.
Prepaying also comes with tax
deductions.
Consult
with
accountants about deduction.
HOW PREPAID EXPENSES WORK
FOR BUSINESS’S ACCOUNTING?
Ex. Business pays $12,000 on
January 1 for rent for the entire
year. If you expense the payment,
the entire $12,000 hits your book
in January. However, benefits are
not fully received for the entire
year yet because rent accrues on a
monthly basis.
In journal entry, you spread
$12,000 across 12 months of the
year. By posting the transaction
each month and adjusting your
prepaid balance, you can recognize
$1,000 each month so rent
expense becomes consistent.

This is one of those opposite
accounts— Contra-asset account
—where we increased it with a
credit and decrease a balance with
a debit. In other words, it has
natural credit balance.
Promissory note is a signed
document containing a written
promise to pay a stated sum to a
specific person or bearer at a
specific date or on demand.


Contracts
(Written
agreement) that need to
be accounted on the
balance sheet.
Can be long term or short
term.
year=
Notes Payable


A long-term asset like vehicle can
lose thousands of dollars in value
each year. We keep running a total
of how much value it’s lost in an
account
called
Accumulated
Depreciation.
Paid
over
a
Noncurrent Asset

Liability
Paid in less than a year=
Current Liability
Paid in over the year= Long
term liability
Accounts
Uncollectible
are
receivable, loans, or other debts
that have virtually no chance of
being paid.
Customer buys on credit; Amount
added to accounts receivable.
After, Customer fails to pay after
the due date; money moved to
“aged” receivable account. Then, if
even more some time passes with
no payment; money moves to
“doubtful
accounts.
Lastly,
customer is not expected to pay.
Money moves to accounts
uncollectible. That amount is
logged as bad debt on income
statement.
Ex
Summer’s Nature oil
Two ways to write of bad debts;
Direct Write-off Method
Pros



Cons


Reasons for promissory note


Inter-company loans
Converting
overdue
payments to a note
charging interest
Notes receivable and Notes
Payable are balance sheet
accounts that record the value of
promissory notes that a business
owes or is owed.
Notes Receivable


Asset
Paid in less than a year=
Current Asset
Accounts Receivable: 5,000
Doubtful Accounts: 1,000
Net Account Receivable: 4,000
Bad Debts is an expense that a
business
incurs
once
the
repayment of credit previously
extended to a customer is
estimated to be uncollectible.
Does not follow the
matching principle
Could make a business
more profitable than it
actually is.
Allowance Method
Pros



Sales: 5,000
Nature’s Bounty: 1,000
Simple
Takes care of uncollectible
accounts in a single journal
entry
Easier for business owners
with
no
accounting
background.
Companies
analyze
invoices and estimate the
amount for bad debt
expense
Adheres to the matching
principle
More accurate books
Cons

More Complex