Unit 2 Tutorials: Financial Reporting
INSIDE UNIT 2
End of the Accounting Period
Conceptual Framework and Principles
End of Period Activities
Trial Balance
Case Study: Trial Balance Worksheet
Adjusting Entries
Creating Adjusting Entries
Closing Entries
Closing Process
Financial Statements
Income Statement
Preparing Income Statements
Case Study: Income Statement
Statement of Changes in Owner's Equity
Preparing Statements of Changes in Owner's Equity
Case Study: Statement of Changes in Owner's Equity
Balance Sheet
Preparing Balance Sheets
Case Study: Balance Sheet
Conceptual Framework and Principles
by Sophia

WHAT'S COVERED
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Page 1
This lesson will cover some key principles underlying the practice of accounting. Specifically, this
lesson will cover:
1. Principles of Accounting
2. Additional Principles of Accounting
3. Accrual Basis vs. Cash Basis
1. Principles of Accounting
Let's begin by discussing four key accounting principles:
Measurement/Cost Principle. The measurement/cost principle is that accounting is based on actual costs.
The common measurements used for the measurement/cost principle in accounting are historical cost and
fair value.
Matching Principle. This principle deals with revenue recognition, which is that revenues are recognized
when they are earned-- the keyword being "earned." The other matching principle is the expense
recognition principle, which is that expenses are recorded when incurred to generate revenue. This is
where we get the match: we are matching our expenses with our revenue.
Full Disclosure Principle. The keyword here is "disclosure." A company must report all the details behind the
financial statements that may impact user decisions. If it influences decisions, information must be provided
in the financial statements or the notes to the financial statements.
Time Period Principle. A company must have consistent and consecutive periods of reporting, whether
monthly, quarterly, or annually.
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2. Additional Principles of Accounting
The chart below details some additional principles in accounting:
Principle
Meaning
Verifiability
The accounting information can be independently verified.
Economic Entity
A company is separate from owners and other businesses.
Monetary Unit
Principle
Materiality
Going Concern
Objectivity
Transactions are denominated in currency, depending on a country's native currency
(e.g., for U.S.-based businesses, transactions are denominated in dollars, whereas in
Europe, transactions are denominated in euros.)
If error or omission would influence decisions, then that information is considered
material.
A company will be able to continue to operate to fulfill its commitments.
Information provided cannot be biased towards one user group; the information must be
objective.
The quality of information that can be understood by reasonably informed users,
Understandability
meaning reasonably informed users need to be able to understand the information in the
financial statements.
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Reliability
The information provided is complete and free from material error, and therefore reliable.
Comparability
Information reported for different companies is reported similarly (i.e., Company A and
Company B must report in such a way that they can be easily compared).
3. Accrual Basis vs. Cash Basis
Now, let's talk about accrual basis versus cash basis. Under accrual basis, everything hinges on the revenue
and expense recognition:
Revenues are recognized when earned.
Expenses are recognized when they are incurred.
Our principles--our revenue, our expense, and our matching principles--are guiding us in accrual basis. Also,
accrual basis is the type of accounting that we must use for GAAP.
In contrast, under the cash basis:
Revenues are recognized when cash is received.
Expenses are recognized when cash is paid.
Under cash basis, cash drives recognition. We're not concerned with matching our revenues with our expenses
when they're incurred. It is purely based on when cash is paid and cash is received. Also, the cash basis of
accounting is not GAAP.

TRY IT
For the following questions, determine if accounting recognizes in the same period or the following period.
If a customer comes into your store and pays cash for their purchase, how does accounting
recognize the revenue on an accrual basis?
+
The same period. The revenue was earned at the time of the sale.
If a customer calls you and orders cleaning services to be done next month, and charges this to his
account, how does accounting recognize the revenue on an accrual basis?
+
The following month. The revenue will not be earned until the services are performed.

SUMMARY
Today we learned about the four key principles of accounting: the measurement/cost principle, full
disclosure principle, time period principle, and matching principle, involving revenue recognition and
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expense recognition. We also covered several additional principles which are useful in the practice of
accounting. Lastly, we learned about accrual basis versus cash basis. Remember, accrual basis is the
GAAP basis of accounting.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
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End of Period Activities
by Sophia

WHAT'S COVERED
This lesson will cover the series of activities that occur at the end of an accounting period. Specifically,
this lesson will cover:
1. Time Periods and Reporting
2. Trial Balance Worksheet
2a. Trial Balance
2b. Adjustments
2c. Adjusted Trial Balance
2d. Income Statements
2e. Balance Sheet
2f. Closing Entries
3. Financial Statements
1. Time Periods and Reporting
The time period assumption is that businesses must have consistent periods of reporting, and that these
periods are consecutive--monthly, quarterly, or annually.
So, how do you determine your report timing? Well, law dictates report timing for publicly traded companies;
they have SEC requirements to report quarterly and annually. Therefore, in order to be SEC compliant, publicly
traded companies have to report quarterly as well as annually.
Privately owned companies, on the other hand, don't have an SEC requirement, so they don't have that same
regulatory requirement to report every quarter. However, they do have to report annually for tax purposes.
It is important to report consistently to ensure report accuracy. At the end of the reporting period, a business
provides accurate reporting, and in order to do this, their data needs to be complete. The way to ensure that the
data is complete and accurate is through the use of the trial balance, which we will discuss next.
2. Trial Balance Worksheet
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The trial balance worksheet is a listing of all the general ledger accounts. It details all account balances, and the
debits and the credits for the individual general ledger accounts.

HINT
Remember, total debits must always equal total credits.
In a trial balance worksheet, the sections include:
Trial Balance
Adjustments
Adjusted Trial Balance
Income Statements
Balance Sheet
Closing Entries
2a. Trial Balance
Here is a sample trial balance worksheet, below. As mentioned, the trial balance worksheet has a list of all the
general ledger accounts, which you can see on the left. It also details the debits and credits, and the balances
within those general ledger accounts. The trial balance worksheet is used in preparing a trial balance to ensure
that accurate data is provided.
View this spreadsheet in Google Sheets
2b. Adjustments
Once you have the trial balance, you can begin to make your adjustments. You will adjust for any accruals and
prepaids, and correct any errors and omissions. This is also where you perform your matching, making sure that
your revenues are matched with your expenses.
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View this spreadsheet in Google Sheets
2c. Adjusted Trial Balance
After you've made all of your adjustments, you can prepare your adjusted trial balance. The adjusted trial
balance is going to be the source for your financial statements.
View this spreadsheet in Google Sheets
2d. Income Statements
Now that you have your adjusted trial balance, you can prepare your financial statements; this trial balance
worksheet can be used to prepare your income statement. The income statement comprises all of your
revenues and expenses, and it is also where you can identify your net income. As you can see in this example,
your net income is $13,500, which is the difference between your credits and debits.
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View this spreadsheet in Google Sheets
2e. Balance Sheet
So, after you have your income statement, you can prepare your balance sheet. The balance sheet has all of
your assets, liabilities, and equity--all of your permanent accounts.
View this spreadsheet in Google Sheets
2f. Closing Entries
Once you have your financial statements, that part is complete. You can move on to making your closing entries.
You can close out your temporary accounts--which are your revenues and expenses--for the period to start
fresh for the next period.
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View this spreadsheet in Google Sheets

HINT
Remember the correct order of steps in preparing the trial balance worksheet--it's important.

WATCH
3. Financial Statements
The financial statements are the final step in the reporting process. There are four main financial statements:
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
HINT
A statement of changes in owner's equity is sometimes referred to as a statement of retained earnings
It's important to note that there is a specific order to the preparation of the financial statements:
1. Income statement.
2. Statement of changes in owner's equity: This is because the net income from your income statement flows
into your statement of changes in owner's equity.
3. Balance sheet: It happens at this point in the order because the ending balance in the owner's equity from
the statement of changes in owner's equity feeds into the balance sheet.
4. Statement of cash flows: This contains the ending cash balance, which is obtained from the balance sheet.
As you can see, the reason behind the specific order to the financial statements is because information from
one financial statement flows into the succeeding one.

SUMMARY
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Today we learned about time periods and reporting, including the different reporting requirements. We
walked through a trial balance worksheet, from the trial balance all the way through to the closing
entries. Lastly, we discussed the four main financial statements, including the source of the financial
statements, as well as their sequence. We learned how the net income from the income statement
feeds into the statement of changes in owner's equity, the statement of changes of owner's equity
feeds into the balance sheet, and the balance sheet provides the ending cash balance for the
statement of cash flows.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
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Trial Balance
by Sophia

WHAT'S COVERED
This lesson will cover the trial balance, focusing on what it is, how it is used in the accounting process,
and its two types. Specifically, this lesson will cover:
1. Trial Balance
2. Unadjusted Trial Balance
2a. Example
2b. Categories
1. Trial Balance
The trial balance is a list of the debit and credit balances of all the general ledger accounts at a given time.
The trial balance is used as a summary or a checkpoint that all of the account totals--all of the debits and
credits--equal.
The trial balance is also used to identify any errors or inconsistencies in journalizing and posting. Did you make
any errors? Did you miss anything through the journalizing and posting process? Do your debits not equal your
credits?
The trial balance is also used to identify any balances that seem incorrect.
EXAMPLE Suppose you have an understanding of the natural balances of your different types of
accounts, and when looking at your trial balance, you notice that those accounts aren't fitting with your
understanding of their natural balance. This might mean you need to dive deeper into that specific account
and identify any potential issues.
So, who uses the trial balance? Well, the trial balance is used exclusively by internal users; it is not provided to
external users or for external reporting purposes.
There are two types of trial balances:
Unadjusted trial balance, which is essentially the working document. This is used by the accountant for
analysis and adjustments, to ensure that debits equal credits, and to identify any accounts might contain
inconsistencies. Therefore, the unadjusted balance helps to identify completeness.
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Adjusted trial balance, which is used to prepare financial statements and contains those corrections for
errors or mistakes.

TERM TO KNOW
Trial Balance
A list of the debit and credit balances of all of the general ledger accounts at a given time.
2. Unadjusted Trial Balance
2a. Example
Let's look at an unadjusted trial balance worksheet example, below. Any trial balance worksheet starts with a list
of all of the general ledger accounts, listed on the left side. Along with listing those general ledger accounts, the
balance in each of those accounts is reflected, indicating whether it is a debit balance or a credit balance.
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View this spreadsheet in Google Sheets

BIG IDEA
The important thing to note is that the debits must always equal the credits. As you can see above, there is
a total of $302,000 in debits and $302,000 in credits. This is what we use the trial balance for: to make sure
that our accounts balance and nothing seems out of the ordinary.
2b. Categories
Next, we will examine the different account categories:
Trial
Balance
Description
Examples
Category
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Assets
Listed from most liquid (cash) to least liquid (in this case,
Cash, Accounts Receivable,
buildings). This refers to how quickly an asset can be
Supplies, Prepaid Insurance,
converted to cash. The natural balance of these asset
Buildings, and Accumulated
accounts is a debit balance.
Depreciation - Buildings
Listed in their correct order, from short-term to long-term.
Liabilities
Liabilities have a natural credit balance, so you can see the
credits reflected in the liabilities.
Accounts Payable and Notes
Payable
Has a natural balance of credit, as is the case with the
Equity
common stock and retained earnings. As you may recall,
Common Stock, Retained Earnings
owner draws refers to when the owner pulls cash out of a
1/1/24, and Owner Drawings
business, so this is going to be a debit to the equity.
Revenue
Has a natural credit balance
Expense
Has a natural debit balance.

Sales
Salaries Expense, Advertising
Expense, and Interest Expense
SUMMARY
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Today we learned about the trial balance in detail, as an internal summary and analysis tool that can
help to identify any inconsistencies or balances that seem incorrect, and verify that total debits and
credits are equal. We also walked through a comprehensive example of an unadjusted trial balance, a
list of the debit and credit balances of all the general ledger accounts at any given time.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

TERMS TO KNOW
Trial Balance
A list of the debit and credit balances of all of the general ledger accounts at a given time.
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
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Case Study: Trial Balance Worksheet
by Sophia

WHAT'S COVERED
This lesson will cover the preparation of a trial balance worksheet in the context of a case study, using a
hypothetical business. Specifically, this lesson will cover:
1. Case Study: Legacy Realty
2. Case Study: Trial Balance Worksheet
2a. Trial Balance
2b. Adjustments
2c. Adjusted Trial Balance
1. Case Study: Legacy Realty
The subject company for our case study is called Legacy Realty. Legacy Realty is a sole proprietorship, which is
a type of company that is owned by one single individual, and where that individual and the business are legally
treated as the same.
The purpose of Legacy Realty as a business is to own, lease, and manage its own rental properties. It purchases
houses and condominiums and leases them out to tenants. They also perform their own management of their
units, making repairs, performing maintenance, and collecting rent. Legacy Realty is located in Washington, D.C.,
and they have a small staff of five people.
Legacy Realty
Type of company
Sole proprietorship
Business purpose
Own, lease, and manage rental properties
Business location(s)
Washington, D.C.
Staff of 5 people
Legacy Realty needs a trial balance worksheet to serve as a check for accuracy for the accounting department.
It can help Legacy Realty to identify errors or inconsistencies that happened during the journalizing and posting
process. Using the trial balance worksheet, they can make sure that their debits and credits are equal and in
balance. They can also use it to identify any balances that seem incorrect. The trial balance worksheet is used
for internal analysis only; it is not provided to external users.
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2. Case Study: Trial Balance Worksheet
Let's jump right in and start preparing a trial balance worksheet.
2a. Trial Balance
The trial balance provides a listing of all the general ledger accounts, as well as the balances within those
accounts, whether it's a debit balance or a credit balance:
Component
Legacy Realty Accounts
Cash
Accounts Receivable
Supplies
Assets (listed from most liquid to least liquid)
Prepaid Insurance
Buildings
Land
Accumulated Depreciation - Buildings
Accounts Payable
Liabilities (listed from short-term to long-term)
Unearned Revenue
Notes Payable
Equity
Revenue
Retained Earnings, 1/1/24
Owner Drawings
Revenue
Salaries Expense
Repairs Expense
Expenses
Advertising Expense
Rent Expense
Interest Expense
Here is the Legacy Realty trial balance worksheet, starting with the trial balance.
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View this spreadsheet in Google Sheets
Note that assets and expenses naturally have a debit balance, while liabilities, equity, and revenue naturally
have a credit balance. As you can see, this company has cash on hand, as well as some receivables. They have
purchased some buildings. They have accounts payable, so they owe some money. They also have notes
payable, so they owe some money to a bank. Lastly, it appears that they have earned $600,000 in revenue, and
have paid several types of expenses.
2b. Adjustments
Now that we have the trial balance, we can make the following adjustments:
1. Adjust supplies used:
Supplies Expense: $2,500 debit
Supplies: $2,500 credit
2. Adjust insurance incurred:
Insurance Expense: $6,000 debit
Prepaid Insurance: $6,000 credit
3. Record depreciation on the fixed assets:
Depreciation Expense - Buildings: $15,000 debit
Accumulated Depreciation - Buildings: $15,000 credit
4. Correct revenue recognition to account for incorrectly recognizing some revenue:
Revenue: $10,000 debit
Unearned Revenue: $10,000 credit
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5. Accrue for some salaries owed to employees:
Salaries Expense: $25,000 debit
Accounts Payable: $25,000 credit
Here is the Legacy Realty trial balance worksheet, with the above adjustments.
View this spreadsheet in Google Sheets
2c. Adjusted Trial Balance
So, we started with the trial balance and made adjustments to match revenues and expenses with the correct
period, as well as to correct any errors or omissions. Now we can prepare the adjusted trial balance, which is
simply the trial balance adjusted for all the adjustments that were made. Once we have the adjusted trial
balance, we can use this information to prepare the financial statements.
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View this spreadsheet in Google Sheets


WATCH
SUMMARY
Today we introduced our case study company called Legacy Realty, that is in the business of owning
and leasing their own rental properties. We walked through an example of preparing a trial balance
worksheet, starting with the trial balance, then making all of the adjustments to the trial balance, and
finally, preparing the adjusted trial balance which can be used to create the financial statements.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
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Adjusting Entries
by Sophia

WHAT'S COVERED
This lesson will cover the topic of adjusting entries. Specifically, this lesson will cover:
1. Adjusting Entries
2. Types of Adjusting Entries
2a. Unearned Revenues
2b. Prepaid Expenses
2c. Accrued Expenses
2d. Accrued Revenues
2e. Supplies
2f. Depreciation
2g. Error Correction
1. Adjusting Entries
An adjusting entry is an entry that is made at the end of an accounting period to report any unrecognized
income or expenses for that period.
The purpose of an adjusting entry is to correct values, which speaks to the concept of matching principles-revenue recognition and expense recognition. We need to match those revenues and expenses with the
correct period. An adjusting entry is also used to correct errors and omissions. If any errors or mistakes were
made during the journalizing and posting process, they can be corrected through an adjusting entry.
As mentioned in the definition, adjusting entries are entered at the end of the period, not the beginning. They
are not recorded as part of the daily activity.
Now, where are these adjusting entries entered? They are entered in the general journal, which then gets
posted to the general ledger. Adjusting entries are also put in the trial balance worksheet, which we work
through at the end of the period.

TERM TO KNOW
Adjusting Entry
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An entry that is made at the end of an accounting period to report any unrecognized income or
expenses for that period.
2. Types of Adjusting Entries
There are several different types of adjusting entries.
2a. Unearned Revenues
With unearned revenue adjusting entries, in the initial transaction, services were paid for, but had not been
performed, meaning cash was received, but no revenue was recorded. Then, during the period, services were
performed.
At the end of the period, we have to recognize the revenue earned during the period, which speaks to revenue
recognition principle.
Unearned Revenues
Why is this adjustment
Initial Transaction: Services were paid for, but had not been performed
made?
During the period: Services were performed
What adjustment is
End of period: Recognize revenue earned during the period (revenue
needed
recognition principle)
2b. Prepaid Expenses
With prepaid expense adjusting entries, initially, the expense was paid for, but had not been incurred, meaning
cash was paid, but no expense was incurred or recorded. Then, during the period, the expense was incurred.
At the end of the period, we have to record the expense incurred during the period, speaking to the expense
recognition principle--we have to recognize that expense.
Prepaid Expenses
Why is this adjustment
Initial Transaction: Expense was paid for but had not been incurred
made?
During the period: Expense incurred
What adjustment is needed
End of period: Record expense incurred during the period (expense recognition
principle)
2c. Accrued Expenses
With accrued expense adjusting entries, initially no transaction was recorded. Then, during the period, an
expense was incurred, but not paid or recorded.
The expense incurred during the period needs to be recorded before paid.
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Accrued Expenses
Why is this adjustment
Initial Transaction: No transaction recorded
made?
During the period: Expense incurred but not paid/recorded
What adjustment is needed
End of period: Record expense incurred during the period (expense recognition
principle)
2d. Accrued Revenues
With accrued revenues adjusting entries, initially no transaction was recorded. Then, during the period, revenue
has been earned, but not paid or recorded.
At the end of the period, we have to record the revenue that we earned during the period, speaking to the
revenue recognition principle: record revenue as it is earned.
Accrued Revenues
Why is this adjustment
Initial Transaction: No transaction recorded
made?
During the period: Revenue earned but not paid/recorded
What adjustment is needed
End of period: Record revenue earned during the period (revenue recognition
principle)
2e. Supplies
With supplies adjusting entries, initially, when the supplies were purchased, they were recorded as an asset.
Then, during the period, those supplies were used in business operations, to generate revenue, so now there
aren't as many supplies on hand.
At the end of the period, we record the use of those supplies as an expense (expense recognition principle). It is
also to reflect the appropriate asset value in our supplies account, as we now have less on hand than when we
purchased them.
Supplies
Why is this adjustment
Initial Transaction: Purchased supplies - recorded as asset
made?
During the period: Supplies were used in business operations
What adjustment is needed
End of period: Record use of the supplies as expense (expense recognition
principle)
2f. Depreciation
With depreciation adjusting entries, initially, an asset, such as equipment, was purchased. A portion of the
asset's useful life has now been used, to generate revenue.
At the end of the period, we have to record the portion of the useful life used as a depreciation expense.
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Depreciation
Why is this adjustment made?
What adjustment is needed
Initial Transaction: Purchased an asset
During the period: A portion of the asset's useful life has been used
End of period: Record the portion of the useful life used as expense
2g. Error Correction
With error correction adjusting entries, services were performed, and at that time, revenue and a receivable
were recorded. Then, during the period, cash payment was received from that customer, and it was recorded as
revenue again. Therefore, revenue was recorded twice.
At the end of the period, we have to correct the revenue that we recorded from our cash payment, because we
correctly recorded it when we performed those services. We have to make that correction for the double
counting of revenue.
Error Correction
Why is this adjustment made?
What adjustment is needed

Initial Transaction: Performed services, recorded revenue and receivable
During the period: Received cash payment and recorded as revenue
End of period: Correct revenue recorded from cash payment
TRY IT
You have purchased $10,000 in supplies in January and booked them as an asset. During the month you
use $6,000 in supplies.
At the end of January, what is the amount of an adjusting entry recorded as an expense?
$10,000
$6,000
$4,000
+
$0 - an adjusting entry is not needed
$6,000 is recorded as an expense for supplies used in January.

SUMMARY
Today we learned about adjusting entries, which are done at the end of the period. They are used to
match revenues and expenses with the correct period, as well as to correct errors or omissions. We
also learned about the different types of adjusting entries, exploring several examples of adjusting
entries that are common in practice.
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Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

TERMS TO KNOW
Adjusting Entry
An entry that is made at the end of an accounting period to report any unrecognized income or expenses
for that period.
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Creating Adjusting Entries
by Sophia

WHAT'S COVERED
This lesson will cover a brief review of adjusting entries, followed by how to create adjusting entries.
Specifically, this lesson will cover:
1. Adjusting Entries: A Review
2. Adjusting Entries: Examples
2a. Unearned Revenues
2b. Prepaid Expenses
2c. Accrued Expenses
2d. Accrued Revenues
2e. Supplies
2f. Depreciation
2g. Error Corrections
3. Trial Balance Worksheet: Example
3a. Trial Balance
3b. Adjustments
3b. Adjusted Trial Balance
1. Adjusting Entries: A Review
An adjusting entry is an entry that is made at the end of an accounting period to report any unrecognized
income or expenses for that period.
The purpose of an adjusting entry is to correct values, which speaks to the concept of matching principles-revenue recognition and expense recognition. We need to match those revenues and expenses with the
correct period. An adjusting entry is also used to correct errors and omissions. If any errors or mistakes were
made during the journalizing and posting process, they can be corrected through an adjusting entry.
As mentioned in the definition, adjusting entries are entered at the end of the period, not the beginning. They
are not recorded as part of the daily activity.
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Now, where are these adjusting entries entered? They are entered in the general journal, which then gets
posted to the general ledger. Adjusting entries are also put in the trial balance worksheet, which we work
through at the end of the period.
2. Adjusting Entries: Examples
Now we're going to look at examples of different types of adjusting entries and how they would be created in
the general journal.
Note, for all of these examples today, we're going to be reporting at 12/31/23, the end of the year, and thus
making our adjustments at the end of the year.
2a. Unearned Revenues
In the initial transaction, we received $12,000 of cash on July 1, 2022, for monthly services through June 30,
2023, so on that date, we recorded the cash and the unearned revenue. Note, it's unearned revenue because
we haven't performed the services yet.
The adjustment is that services had been performed during the period, so at the end of the year, we have to
reduce our unearned revenue and recognize the amount of revenue that we earned during the period.
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2b. Prepaid Expenses
Initially, we paid $12,000 for an insurance policy that includes coverage through June 30, 2023. You can see
that we purchased that on July 1, 2022. We recorded our prepaid insurance, and cash being paid for it.
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Our adjustment, now that expenses have been incurred during the period, is to record the insurance expense
and reduce our prepaid insurance for the six months that we have covered.
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2c. Accrued Expenses
Initially, we incurred $5,000 of salaries in December of 2022 that were paid in January 2023. So, initially we
didn't record anything.
The adjustment is to record the expenses that we incurred, so at the end of the year, we have to record our
salary's expense, and then record our accounts payable, or that money that is owed for those salaries.
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2d. Accrued Revenues
We perform $20,000 of services in December 2022 that were paid for in January 2023. Now, we haven't
recorded anything.
The adjustment we have to make is to record the revenues that we earned, "earned" being the keyword. In
compliance with the matching principle, at 12/31/12, we have to record accounts receivable--the money that
we're going to receive from our customer--and recognize that revenue of $20,000 that we earned in December.
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2e. Supplies
Initially, we purchased $10,000 of supplies, so on January 1st, 2022, we recorded an asset of supplies in the
amount of $10,000.
What is the adjustment? Well, $5,000 of those supplies were used during the period to help generate revenue
for the business. Therefore, a twofold adjustment is needed. We have to record the expense of supplies that
were used, and we also have to reduce that supplies asset to reflect the appropriate balance of the supplies
account.
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2f. Depreciation
Initially, we purchased $50,000 of equipment at the beginning of the year on January 1, 2022, for cash.
Adjustment-wise, we need to record the portion of the equipment's useful life that has been utilized, so at the
end of the year, we have to record depreciation expense. We also recorded accumulated depreciation, which is
where we track the total depreciation for that piece of equipment.
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2g. Error Corrections
Initially, on November 1, 2023, we recorded $5,000 of cash received as revenue.
Now, it turns out that the cash payment was for accounts receivable. However, we had already recognized that
revenue. To correct this, at the end of the year, we have to reverse that revenue recognition out, meaning we
need to debit our revenue. Then, we would credit our accounts receivable because it was a payment for
accounts receivable. We have to reduce our revenue, as well as reduce our accounts receivable to correct for
that error.
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
WATCH
3. Trial Balance Worksheet: Example
Lastly, let's look at the trial balance worksheet and how these adjusting entries fit into that.
3a. Trial Balance
Here is the trial balance worksheet, starting with our trial balance. We have a list of all the ledger accounts and a
detail of all the debit or credit balances in those accounts.
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3b. Adjustments
We've identified all of our adjustments, so now we're going to enter these adjustments into the trial balance
worksheet. As shown in the worksheet below, you can see all of the adjustments reflected in the adjustments
columns.
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3b. Adjusted Trial Balance
Now we can prepare our adjusted trial balance, which is simply taking the trial balances within those individual
accounts and adjusting them per the adjustments that we made in the middle column. As you can see, we now
have balances in our supplies expense, insurance expense, and depreciation expense. Once all of our
adjustments have been entered, we can then use the adjusted trial balance to create our financial statements.
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View this spreadsheet in Google Sheets

SUMMARY
Today we covered a review of adjusting entries, then walked through several examples of creating
adjusting entries. Lastly, we looked at preparing an adjusted trial balance with an example of a trial
balance worksheet.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.
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Closing Entries
by Sophia

WHAT'S COVERED
This lesson will cover the topic of closing entries and how they are used. Specifically, this lesson will
cover:
1. Closing Entries
2. Objectives of Closing Entries
3. Closing Procedure
1. Closing Entries
A closing entry is an entry made at the end of an accounting period that is used to close out a temporary
account. You may recall that temporary accounts are those accounts whose balances are closed at the end of
an accounting period and reopened at the beginning of the next period.
Now, where are these closing entries made? Well, closing entries are made in the general journal, and the
general journal gets posted to the general ledger.
As mentioned in the definition, the accounts that get closed are the temporary accounts--not the permanent
accounts. The temporary accounts comprise the revenues and expenses, which we will discuss in more detail in
the next section. There is also another account that needs to get closed: the drawing account or the owner
draw account. The drawing account is an account that keeps a record of money taken out of the business by its
owner or owners. This means that any time an owner or some of the owners pull money out of the business, it
gets tracked in the drawing account.

HINT
It is important to note that a C Corp does not have a drawing account.
So, why are closing entries made? Well, temporary accounts are closed to ensure accurate reporting. Those
temporary accounts are period-based accounts, so they track specific activity for a given period. Temporary
accounts are reopened for the following period so that they can report activity for only one specific period.

TERMS TO KNOW
Closing Entry
An entry made at the end of an accounting period that is used to close out a temporary account.
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Temporary Accounts
Accounts whose balances are closed at the end of an accounting period and reopened at the
beginning of the next period.
Drawing Account
An account that keeps a record of money taken out of the business by its owner or owners.
2. Objectives of Closing Entries
The purpose of closing the accounting system is to determine net income or net loss. This is achieved through
closing the temporary accounts, which, as mentioned, are those accounts whose balances are closed at the
end of an accounting period and reopened at the beginning of the next period.
The temporary accounts reflect revenue, which is earnings from interest or from the sale of goods or services,
and expense, which is costs associated with operating or maintaining a company. These accounts are closed to
determine net income or loss; think of this as hitting the reset button.
Once net income or loss is determined, through closing the temporary accounts and effectively hitting the reset
button, that net income or loss must be transferred to equity.

TERMS TO KNOW
Revenue
Earnings from interest or from the sale of goods or services.
Expenses
Costs associated with operating or maintaining a company.
3. Closing Procedure
Next, let's look at the specific procedure for making closing entries, utilizing what is called the REDI method.
Temporary account groups are closed by processing netting journal entries on their unnatural balance side.
Netting refers to looking at the total balance of the account, whether it's debit or credit, and recording a closing
entry for that amount to the opposite side.
EXAMPLE Suppose you have an account with a current debit balance. Through netting, you would
book an entry for that same amount to the opposite side so that the account nets to zero.
The REDI method refers to the following process:
Revenues.
Expenses.
Drawings.
Income Summary.
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First, we close out our revenues. Then we move on to expenses. Drawings is the next type of temporary
account we need to close. Now, where do all those go? Those go to the income summary.
So we close our revenues, our expenses, and our drawings to the income summary, which then gets closed to
our retained earnings.

HINT
Be sure to remember the correct sequence of close out entries.

SUMMARY
Today we learned about closing entries, which are entries made at the end of an accounting period and
used to close out a temporary account. Remember, temporary accounts are those accounts whose
balances are closed at the end of an accounting period and reopened at the beginning of the next
period. The types of temporary accounts that need to be closed out are revenues, expenses, and the
owner's drawing accounts.
We also learned about the objectives of closing entries. The purpose of closing the accounting system
is to determine net income or net loss. Once net income or loss is determined, through closing the
temporary accounts and effectively hitting the reset button, that net income or loss must be transferred
to equity. Lastly, we learned about the closing procedure, using the REDI method--Revenues, Expenses,
Drawings, all closed to the Income Summary.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

TERMS TO KNOW
Closing Entry
An entry made at the end of an accounting period that is used to close out a temporary account.
Drawing Account
An account that keeps a record of money taken out of the business by its owner or owners.
Expenses
Costs associated with operating or maintaining a company.
Revenue
Earnings from interest or from the sale of goods or services.
Temporary Accounts
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Accounts whose balances are closed at the end of an accounting period and reopened at the beginning
of the next period.
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Closing Process
by Sophia

WHAT'S COVERED
This lesson will cover the closing process, the last phase in the accounting cycle. Specifically, this
lesson will cover:
1. Closing Process
2. Closing Entries
2a. General Journal
2b. General Ledger
3. Post Closing Trial Balance
1. Closing Process
Let's begin our discussion on the closing process by looking at the trial balance worksheet, specifically the
adjusted trial balance. As you can see in the trial balance worksheet below, we have already worked through
any adjustments, made the adjusted trial balance, and created the financial statements. Now it's time to close it
out.
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View this spreadsheet in Google Sheets
The next step is to look at the adjusted trial balance and clear out the temporary accounts, which are the
revenues and expenses. If we populate the closing entries below, you'll see that we need to zero out the
balances in all of the temporary accounts.
EXAMPLE If you look at owner drawings, we have a $2,000 debit balance in the adjusted trial balance.
Therefore, we need to clear it out with a closing entry of $2,000 to the credit side. Similarly, if you take a
look at sales, we have a $150,000 credit balance in the adjusted trial balance, so we need to enter a
$150,000 debit as a closing entry.
We complete this process for all of our revenue and expense accounts, as well as our drawing account, and any
difference is put to income summary.
EXAMPLE In this case, the difference was $150,000 in the debit column and $138,500 in the credit
column, or $11,500.
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View this spreadsheet in Google Sheets
Then, we also have to close out the income summary account. If we close out the income summary account,
you can see that there is now a debit and a credit, so there is going to be no balance in that account. The
$11,500 difference is put to the retained earnings for the end of the year.
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
WATCH
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2. Closing Entries
Now that we've gone through organizing the closing entries on the trial balance worksheet, let's look at
journalizing those transactions--getting the closing entries into the general journal and ultimately posted to the
ledger.
2a. General Journal
We need to enter all of the entries that we identified on the trial balance worksheet, starting with revenue, into
the general journal. We are closing out the revenue account to income summary. Since revenue has a credit
balance, we are going to debit it for the $150,000, to zero out the revenue account.
We're going to do the same thing with all of our expenses; now, all of our expenses are going to be credit
entries in the closing process, because they have debit balances on the adjusted trial balance.
Now, we also have to close out the owner drawings, zeroing that account out because it is also an activitybased account. After we've zeroed all of those accounts out, we have one more entry to make, which is to close
the income summary account to our cumulative equity or retained earnings.
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EXAMPLE An owner has with drawn $3500 from the business. The closing entry related to this is:
Debit: Income Summary - $3,500
Credit: Owner's Drawings - $3,500
2b. General Ledger
Now that we've listed all of general journal entries, we need to post them to the general ledger. Each individual
account is going to have its own ledger.
Revenue had a $150,000 balance. We made our closing entry a debit of $150,000 to bring the balance in
revenue to zero.
Owner drawings had a balance of $2,000, so we made our closing entry a credit for $2,000, to zero out the
owner drawings account.

HINT
Now, just as with the revenue and owner drawings accounts, each of those expense accounts that we had
cleared out on the adjusted trial balance is going to have this same general ledger, with a debit balance. A
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Page 45
closing entry, then, will be a credit, bringing the balance in that expense account to zero.
In the income summary, the closing entry for our revenue left us with a $150,000 balance. Notice that we
had no balance in the income summary account, because that is only used in the closing process. Next, we
closed our expenses with a debit, bringing the balance in that income summary to $13,500. The last closing
entry was our drawing account, and we also closed that to income summary, bringing the balance to
$11,500. Finally, we have to clear that balance in our income summary account by closing it to retained
earnings, bringing the balance in the income summary account to zero.

HINT
Remember, income summary is only used in the closing process.
Retained earnings started with $12,000, and through all of our closing entries in the closing process we
identified an additional $11,500 credit to retained earnings, bringing the balance to $23,500.
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
WATCH
3. Post Closing Trial Balance
Once the entries have been posted to the general ledger, then we can move on to the post closing trial
balance, which is another checkpoint in the accounting department to ensure that everything has proceeded
accurately in the closing process. So, let's take a look at the post closing trial balance in the trial balance
worksheet.
Note, we have taken our adjusted trial balance, identified our closing entries, journalized them, and posted
them to the general ledger.
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Now it's time to prepare the post closing trial balance. Looking at the post closing trial balance and all of the
accounts that have balances remaining after we've entered our closing entries, you can see that it is only the
permanent accounts--all of the assets, liabilities, and equity. All of the temporary accounts--drawings, revenues,
and expenses--now have no balances in them. It is only the permanent accounts that carry forward to the next
period.
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View this spreadsheet in Google Sheets


WATCH
SUMMARY
Today we learned about the closing process. We examined the trial balance worksheet., starting with
the adjusted trial balance. We identified the necessary closing entries, put them in our general journal,
and posted them to our general ledger. Once they were posted, we prepared the post closing trial
balance.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 48
Income Statement
by Sophia

WHAT'S COVERED
This lesson will cover the income statement. Specifically, this lesson will cover:
1. Income Statement
2. Income Statement vs. Balance Sheet
3. Types of Income Statements
4. Single Step Income Statement Components
1. Income Statement
Before we begin our discussion of the income statement, it is important to take a step back and define financial
statements, which are reports providing financial information about a business at a given time.
An income statement, then, is a financial statement that provides information about the revenue, expenses, and
net profit or loss of a business for a given time period. A key phrase in that definition is "a given time period."
Let's break down the net profit or loss idea. The income statement helps to identify the business's profitability,
which is a key component of the purpose of the income statement:
The income statement reports on one year or less of a time period.
The income statement helps to assess the health or strength of a business, which is important information
for shareholders and potential investors, as well as banks.
Now, the income statement formula is revenues minus expenses equals net income, revenues being the inflows
from the business operations and expenses being the outflows or the use of assets from the business
operations.

TERMS TO KNOW
Financial Statements
Reports providing financial information about a business at a given time.
Income Statement
A financial statement that provides information about the revenue, expenses, and net profit or loss of a
business for a given time period.
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2. Income Statement vs. Balance Sheet
Now let's compare the income statement to the balance sheet. Keep in mind that the balance sheet reports
balances and the income statement reports activity.
Type of
Financial
Reporting
Accounts Included
Decision Tool
Statement
Reports for a period Temporary accounts;
Income
Statement
Balance Sheet
of time; activity
revenues and
based
expenses
Reports at a point in
time
Assess past performance and predict future
performance
Permanent accounts;
Primarily forward-looking; identify the
assets, liabilities, and
business's position, as of a certain date, and
equity
the implications going forward
3. Types of Income Statements
There are two types of income statement formats: single step and multi-step.
The single step income statement is called such because there is only one step. Remember the income
statement formula? Revenues minus expenses equals net income. This is what the single step income
statement looks like, below. You take your revenues, subtract out your expenses, and arrive at your net income.

FORMULA TO KNOW
Income Statement (Single Step)
The multi-step income statement, on the other hand, has multiple steps.
First, you start with your sales and subtract the cost of goods sold to get your gross profit.
Second, you take that gross profit and subtract all of your operating expenses from the business operations
to get to income from operations.
Third, once you have income from operations, you subtract the other revenues and expenses to ultimately
arrive at your net income.

FORMULA TO KNOW
Income Statement (Multi-Step)
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At the end of the day, the single step and multi-step income statements arrive at the same place, but the multistep statement has several individual steps that involve calculating gross profit and separating out income from
operations, as well as other revenues and expenses.

WATCH
4. Single Step Income Statement Components
Let's look at an example of a single step income statement and break down its component parts:
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Income Statement
Description
Component
Header
It is important that the header includes the words, "For period ending...", because
this indicates that the income statement is reporting on activity for a given period.
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This section includes sales and any other revenue--in this case, interest revenue. It
Revenues
reflects the total revenue from the single step income statement formula.
Next is a detail of all expenses. In this case, there are some selling expense, rent
Expenses
expense, marketing expense, and interest expense, summed to equal the total
expenses.
Net Income
The total revenue of $310,000 minus total expenses of $175,000 equals a net
income of $135,000.
This is the other piece of information contained on this single step income
statement, calculated by taking the net income and dividing it by the number of
Earnings per Share
shares that are owned and issued by the company. If this was a publicly traded
company and they had shares on an exchange, you would list the earnings per
share. In this case, we assumed there were 100,000 shares, so the earnings per
share are $1.35 per share.

TRY IT
Review the following single step income statement and determine if it has the proper components.
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View this spreadsheet in Google Sheets
Does it have a header?
+
Yes, you can see the company name, "Income Statement," and "For the period ending December 31,
2022."
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Does it detail the revenues?
+
Yes, revenues are detailed; in this case, service revenue and interest revenue.
Does it detail the expenses?
+
Yes, expenses are also detailed, slightly different from our first example. In this case, the expenses
include salaries, rent, software and income tax, summed to provide the total expenses.
Does it detail the net income?
+
Yes, net income is calculated by taking total revenue and subtracting total expenses.
Does it detail the earnings per share?
+
Yes, the bottom of the statement includes the earnings per share figure. Assuming we had 200,000
shares outstanding, earnings per share are $1.05 per share.


WATCH
SUMMARY
Today we learned all about the income statement, which is a financial statement that provides
information about the revenue, expenses, and net profit or loss of a business for a given time period.
Remember, those words at the end--"for a given period of time"--are very important because the
income statement is activity-based. We compared the income statement vs. balance sheet, and
learned about the two types of income statements: the single step and the multi-step. Lastly, we
examined two examples of the single step income statement, utilizing the single step of the income
statement formula: total revenues minus total expenses equals net income.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

TERMS TO KNOW
Financial Statements
Reports providing financial information about a business at a given time.
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Page 55
Income statement
A financial statement that provides information about the revenue, expenses, and net profit or loss of a
business for a given time period.

FORMULAS TO KNOW
Income Statement (Multi-Step)
Income Statement (Single Step)
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Preparing Income Statements
by Sophia

WHAT'S COVERED
This lesson will cover how to prepare a multi-step income statement. Specifically, this lesson will cover:
1. Income Statement: A Review
2. Multi-Step Income Statement: Example
2a. Trial Balance Worksheet
2b. Multi-Step Income Statement
1. Income Statement: A Review
To review, the income statement is a financial statement that provides information about the revenue, expenses,
and net profit or loss of a business for a given time period. A key phrase in that definition is "a given time
period," because it is activity-based.
Let's break down the net profit or loss idea. The income statement helps to identify the business's profitability,
which is a key component of the purpose of the income statement:
The income statement reports on one year or less of a time period.
The income statement helps to assess the health or strength of a business, which is important information
for shareholders and potential investors, as well as banks.
As you may recall, the income statement formula is revenues minus expenses equals net income, revenues
being the inflows from the business operations and expenses being the outflows or the use of assets from the
business operations.
There are two types of income statement formats:
Single step, because there is only one step: you take the total revenues and subtract the total expenses to
get to net income.

FORMULA TO KNOW
Income Statement (Single Step)
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Multi-step, which is a little more complex.
1. Start with your sales and subtract the cost of goods sold to get your gross profit.
2. Take that gross profit and subtract all of your operating expenses from the business operations to get to
income from operations.
3. Once you have income from operations, you subtract the other revenues and expenses to ultimately arrive
at your net income.

FORMULA TO KNOW
Income Statement (Multi-Step)
At the end of the day, the single step and multi-step income statements arrive at the same place, but the multistep statement has several individual steps that involve calculating gross profit and separating out income from
operations, as well as other revenues and expenses.
2. Multi-Step Income Statement: Example
Now we're going to cover a detailed example of a multi-step income statement.
2a. Trial Balance Worksheet
Before we begin, let's take a look at our adjusted trial balance on the trial balance worksheet, which is used to
prepare financial statements like the multi-step income statement.
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View this spreadsheet in Google Sheets
Since we are working on the income statement, we need to identify the accounts used to prepare it. Do we
need all of these accounts for the income statement? The answer is no; we don't need the permanent accounts.
All we need are the temporary accounts, the revenues and expenses. As you can see below, we only need the
items at the bottom of the adjusted trial balance, starting with sales through the end of expenses.
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
HINT
Note, there is a difference between the total debits and total credits--they don't equal each other. This
difference is our net income, or $33,500.
2b. Multi-Step Income Statement
Using this information and the multi-step income statement formula, let's start building our income statement.

STEP BY STEP
1. Starting with sales, we pull the sales out and place them on top. We subtract the cost of goods sold to
arrive at our gross profit. Therefore, sales minus cost of goods sold equals gross profit.
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2. Next, we detail our operating expenses. Using our adjusted trial balance, we have salaries, advertising,
insurance, supplies, and depreciation, for a total operating expenses of $134,000. We can then
calculate our income from operations, which is gross profit minus total operating expenses.
3. From there, we look at our other revenue and expense items. In this case, we have interest revenue, as
well as interest expense. Therefore, the total "other" revenue is $17,500. Now we can calculate our net
income. We take our income from operations of $16,000 and add our total "other" revenue of $17,500
to arrive at our net income of $33,500.
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As you see in the above multi-step income statement, we also have the header, starting with the company
name, "Income Statement," and the important phrase "For the period ending...", which in this case is December
31, 2022. This indicates that this is a period-based and activity-based statement.
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Again, remember that you don't need the permanent accounts from your adjusted trial balance; you just need
the temporary accounts--the revenues and expenses.


WATCH
SUMMARY
Today we discussed a review of the income statement, which is a financial statement that provides
information about the revenue, expenses, and net profit or loss of a business for a given time period.
We also explored a comprehensive example of a multi-step income statement.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

FORMULAS TO KNOW
Income Statement (Multi-Step)
Income Statement (Single Step)
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
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Case Study: Income Statement
by Sophia

WHAT'S COVERED
This lesson will cover the preparation of an income statement in the context of a case study, using a
hypothetical business. Specifically, this lesson will cover:
1. Case Study: Legacy Realty
2. Case Study: Income Statement
2a. Trial Balance Worksheet
2b. Income Statement
1. Case Study: Legacy Realty
The subject company for our case study is called Legacy Realty. Legacy Realty is a sole proprietorship, which is
a type of company that is owned by one single individual, and where that individual and the business are legally
treated as the same.
The purpose of Legacy Realty as a business is to own, lease, and manage its own rental properties. It purchases
houses and condominiums and leases them out to tenants. They also perform their own management of their
units, making repairs, performing maintenance, and collecting rent. Legacy Realty is located in Washington DC,
and they have a small staff of five people.
Legacy Realty
Type of company
Sole proprietorship
Business purpose
Own, lease, and manage rental properties
Business location(s)
Washington, D.C.
Staff of 5 people
Legacy Realty needs an income statement to provide information about a business's profitability, informing
about the health or strength of the business, over one year or less of activity. This is important so that Legacy
Realty can analyze the inflows and outflows within their business, which is critical information for potential
investors and banks, as well as for the owners themselves.
2. Case Study: Income Statement
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Page 64
So, where do we start when we need to prepare an income statement? Well, we start with the trial balance
worksheet, specifically the adjusted trial balance, shown below.
2a. Trial Balance Worksheet
As you can see, we've prepared the trial balance, listing all of the general ledger accounts, as well as their
corresponding debit and credit balances. We've also prepared the adjustments and adjustment explanations,
making corrections to the accounts to match all revenues and expenses with the correct period. We've also
corrected any errors or omissions may have been made.
Using this information, we have also prepared the adjusted trial balance, accounting for all of those adjustments
that were made. Similar to the trial balance, the adjusted trial balance is a listing of all of the general ledger
accounts, as well as the corresponding debit or credit balances within those accounts.
This adjusted trial balance is going to be the source for the financial statements, containing all the information
needed to create those statements for Legacy Realty.
View this spreadsheet in Google Sheets
Now, referring back to the adjusted trial balance, do you think we need the information from all of these
accounts to prepare the income statement? No, we don't need the permanent accounts--the assets, liabilities,
and equity. All we need are the revenue and expense accounts, which are the temporary accounts.
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View this spreadsheet in Google Sheets
2b. Income Statement
Now that we've got our adjusted trial balance, we can begin to prepare the income statement. The first part of
the income statement is the heading, which includes the business's name, Legacy Realty Partners, "Income
Statement," and that important phrase, "For the period ending December 31, 2022."

HINT
It is important to remember that prepaid expenses, like office supplies, are considered an asset until they
are used up. In the example above, there are $5,000 worth of office supplies, but only $2,500 worth are
used. Therefore, we record a $2,500 supplies expense, while the other $2,500 remains an asset.
Remember that only revenue and expense accounts should be considered. Since we know those values, we
can calculate the net income in our income statement.

FORMULA TO KNOW
Income Statement (Single Step)

STEP BY STEP
1. Start with documenting revenue, which is $590,000.
2. Next, input all of the operating expenses: salaries, repairs, advertising, rent, insurance, supplies, and
depreciation. This provides the total operating expense of $483,500.
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Page 66
3. Then, we calculate a subtotal of what is called income from operations by subtracting the total
operating expense from revenue. This represents an operating income of $106,500.
4. We add in other revenue or expense items, which in this case is the interest expense which is $20,000.
5. Finally, we subtract the interest expense from the income from operations, to arrive at the total net
income of $86,500.
View this spreadsheet in Google Sheets
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 67


WATCH
SUMMARY
Today we introduced our case study company called Legacy Realty, that is in the business of owning
and leasing their own rental properties. We walked through an example of preparing an income
statement for Legacy Realty, starting with the adjusted trial balance and pulling information from the
revenue and expense accounts to create the income statement.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

FORMULAS TO KNOW
Income Statement (Single Step)
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 68
Statement of Changes in Owner's Equity
by Sophia

WHAT'S COVERED
This lesson will cover the statement of changes in owner's equity. Specifically, this lesson will cover:
1. Statement of Changes in Owner's Equity
2. Statement of Changes in Owner's Equity vs. Income Statement and Balance Sheet
3. Statement of Changes in Owner's Equity: Examples
1. Statement of Changes in Owner's Equity
You may recall that financial statements are reports providing financial information about a business at a given
time.
The"statement of changes in owner's equity" is a financial statement that provides information about changes to
the business's equity over a given time period. It can also be referred to as the statement of retained earnings.
So, what is owner's equity? Well, it refers to owner activity—activity such as income, draws, or loss. Typically, the
statement of changes in owner's equity involves one year or less of an activity period and details the changes in
owner's equity for that time period, similar to the income statement.
The formula for the statement of changes in owner's equity starts with the beginning capital, or the beginning
balance in owner's equity at the beginning of the year. Then, we add any investments by the owner, plus any net
income that the business might have earned, and then subtract owner drawings, meaning any money that the
owner or owners pulled out of the business. This results in the ending owner's equity, or the ending balance in
the owner's equity account.

FORMULA TO KNOW
Statement of Changes in Owner's Equity

HINT
Note that if we have a net loss instead of net income, we would have to subtract the net loss in this formula
instead of adding that income.
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Page 69

TERMS TO KNOW
Financial Statements
Reports providing financial information about a business at a given time.
Statement of Changes in Owner's Equity
A financial statement that provides information about changes to the equity of a business for a given
time period.
2. Statement of Changes in Owner's Equity vs.
Income Statement and Balance Sheet
Next, let's compare the statement of changes in owner's equity with the income statement and the balance
sheet.
Similar to the income statement, the statement of changes in owner's equity reflects a period of time and is
activity-based. The statement of changes in owner's equity reflects the change in the equity balance. While the
balance sheet reflects a point in time, the statement of changes in owner's equity feeds into the balance sheet
because we are looking for the ending equity balance.
The income statement contains the net income or loss, which feeds into statement of changes in owner's equity,
as you can see in the formula in the previous section. The balance sheet contains ending owner's equity, so the
statement of changes in owner's equity feeds to the balance sheet.

BIG IDEA
The statement of changes in owner's equity feeds from the income statement and feeds to the balance
sheet.
3. Statement of Changes in Owner's Equity:
Examples
Let's look at an example of how to prepare a statement of changes in owner's equity.
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View this spreadsheet in Google Sheets

STEP BY STEP
1. We start with the header, which includes the company name, the name of the statement--"Statement of
Changes in Owner's Equity"--and, similar to the income statement, "For the period ending...", in this
case, December 31, 2022, because it is activity-based.
2. Next, we identify our beginning balance at the beginning of the year, which in this case is $300,000.
3. We input any capital added or investment made during the period, such as if the owners put money into
the business. For this example, $10,000 of capital was added.
4. We add any net income, and with this example, is $100,000.
5. Take all of the additions, $110,000 in this case, and add it to the beginning balance, to arrive at a total of
$410,000.
6. Finally, subtract any drawings to arrive at our ending balance at the end of the year. Note, if we had a
net loss, it would go there as well, but in this case, we had net income, so as of December 31, we had a
balance of $390,000 in our owner's equity.
Let's look at a second example of the statement of changes in owner's equity.
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View this spreadsheet in Google Sheets

STEP BY STEP
1. Again, we have our header--business name, "Statement of Changes in Owner's Equity," and "For the
period ending December 31, 2022," because it's an activity-based statement.
2. We start with our beginning balance at the start of the year, $500,000.
3. Input any capital added or investments made during the period: $10,000.
4. In this case, there is no net income to add, so we make a subtotal of $510.000.
5. Then, we subtract our drawings of $10,000. In this case, we also have a net loss of $100,000, so we
include this with our subtractions to arrive at our ending balance at the end of the year of $400,000.


WATCH
SUMMARY
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 72
Today we learned about the statement of changes in owner's equity, which is a financial statement that
provides information about changes to the equity of a business for a given time period. Keep in mind
that it is period- or activity-based. We also compared the statement of changes in owner's equity vs.
the income sheet and balance sheet. Remember, the statement of changes in owner's equity feeds
information to the balance sheet and gets information from the income statement. Lastly, we examined
two examples of a statement of changes in owner's equity.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

TERMS TO KNOW
Financial Statements
Reports providing financial information about a business at a given time.
Statement of Changes in Owner's Equity
A financial statement that provides information about changes to the equity of a business for a given time
period.

FORMULAS TO KNOW
Statement of Changes in Owner's Equity
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Page 73
Preparing Statements of Changes in Owner's
Equity
by Sophia

WHAT'S COVERED
This lesson will cover how to prepare the statement of changes in owner's equity. Specifically, this
lesson will cover:
1. Statement of Changes in Owner's Equity: A Review
2. Statement of Changes in Owner's Equity: Example
2a. Adjusted Trial Balance
2b. Income Statement
2c. Statement of Changes in Owner's Equity
1. Statement of Changes in Owner's Equity: A
Review
To review, the statement of changes in owner's equity is a financial statement that provides information about
changes to the equity of a business for a given time period. Note that it is period- or activity-based. It can also
be referred to as the statement of retained earnings.
Owner's equity refers to owner activity--activity such as income, draws, or loss. Typically, the statement of
changes in owner's equity involves one year or less of an activity period, detailing the changes in owner's equity
for that time period, similar to the income statement.
The formula for the statement of changes in owner's equity starts with the beginning capital, or the beginning
balance in owner's equity at the beginning of the year. Then, we input any capital added or investments by the
owner, plus any net income that the business might have earned, and then subtract owner drawings, meaning
any money that the owner or owners pulled out of the business. This results in the ending owner's equity, or the
ending balance in the owner's equity account.

FORMULA TO KNOW
Statement of Changes in Owner's Equity
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Page 74

HINT
Now, if we have a net loss instead of having net income, we would have to subtract the net loss in this
formula instead of adding that income.
2. Statement of Changes in Owner's Equity:
Example
Let's look at a detailed example of preparing a statement of changes in owner's equity.
2a. Adjusted Trial Balance
The first order of business is to look at the adjusted trial balance, which we can get from our trial balance
worksheet. You may recall that it is necessary to go through the adjusting process to prepare the adjusted trial
balance, prior to preparing the financial statements.
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View this spreadsheet in Google Sheets
Now, the adjusted trial balance will help to identify the balances and accounts that we need to use to prepare
the statement of changes in owner's equity.
2b. Income Statement
The other financial statement needed in order to prepare the statement of changes in owner's equity is the
income statement, because we need to know if there is net income or loss for the period.
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View this spreadsheet in Google Sheets
The income statement, from the trial balance worksheet, is used to identify the accounts that we need to put
into our statement of changes in owner's equity.
2c. Statement of Changes in Owner's Equity
Now, we can use our trial balance worksheet to identify the accounts and amounts needed to prepare the
statement of changes in owner's equity:
Retained earnings (beginning balance): $12,000
Owner drawings: $2,000
Net income: $33,500
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View this spreadsheet in Google Sheets
We are ready to prepare a detailed statement of changes in owner's equity, using this information captured from
the adjusted trial balance and income statement information.

STEP BY STEP
1. The first thing we do is to input the beginning balance of retained earnings as of January 1, 2022. Now,
where do we get this information? We get it from the adjusted trial balance, shown below. Therefore,
our retained earnings as of the beginning of the year is $12,000.
2. The next step is to add any net income. We pull the net income from our income statement, shown
below. In this case, our net income is $33,500. We add the net income to retained earnings for a
subtotal of $45,500.
3. Then, we have our subtractions. In this case, we have owner drawings, as shown on the adjusted trial
balance. This means that the owner has pulled money out of the business, in the amount of $2,000.
Therefore, we subtract the owner draws from the subtotaled retained earnings and net income to arrive
at our ending balance, as of December 31, of $43,500.
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
HINT
Now, we don't have to include a net loss as a subtraction, because, in this case, we had net income.
Using the above information, the statement of changes in owner's equity will look like:
View this spreadsheet in Google Sheets
And as you may have noticed, the first line is the header, which includes the:
Business name
Name of the statement (In this case, "Statement of Changes in Owner's Equity")
The statement "For the period ending December 31, 2022" since it is a period- or activity-based statement


WATCH
SUMMARY
Today we covered a review of the statement of changes in owner's equity, which is a financial
statement that provides information about changes to the equity of a business, for a given time period.
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 79
Remember, it is an activity-based report about the equity of a business. We also walked through a
comprehensive example of preparing a statement of changes in owner's equity, which involves
looking at the adjusted trial balance to pull all of the equity balances, as well as consulting the income
statement to pull the net income.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

FORMULAS TO KNOW
Statement of Changes in Owner's Equity
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Page 80
Case Study: Statement of Changes in Owner's
Equity
by Sophia

WHAT'S COVERED
This lesson will cover the preparation of a statement of changes in owner's equity in the context of a
case study, using a hypothetical business. Specifically, this lesson will cover:
1. Case Study: Legacy Realty
2. Case Study: Statement of Changes in Owner's Equity
2a. Trial Balance Worksheet
2b. Income Statement
2c. Statement of Changes in Owner's Equity
1. Case Study: Legacy Realty
The subject company for our case study is called Legacy Realty. Legacy Realty is a sole proprietorship, which is
a type of company that is owned by one single individual, and where that individual and the business are legally
treated as the same.
The purpose of Legacy Realty as a business is to own, lease, and manage its own rental properties. It purchases
houses and condominiums and leases them out to tenants. They also perform their own management of their
units, making repairs, performing maintenance, and collecting rent. Legacy Realty is located in Washington DC,
and they have a small staff of five people.
Legacy Realty
Type of company
Sole proprietorship
Business purpose
Own, lease, and manage rental properties
Business location(s)
Washington, D.C.
Staff of 5 people
Legacy Realty needs a statement of changes in owner's equity to determine business performance. It details the
owner activity, such as investments in the business and taking money out, to determine if there has been net
income or net loss. This statement helps Legacy Realty to understand the change in owner's equity for a period;
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 81
it's an activity-based statement, similar to the income statement, that generally covers one year or less of
activity.
2. Case Study: Statement of Changes in Owner's
Equity
Let's begin preparing a statement of changes in owner's equity for Legacy Realty.
2a. Trial Balance Worksheet
We'll start with the trial balance worksheet because we need to pull some information from it in order to prepare
the statement.
Here is the trial balance worksheet. Here's what we've done so far:
Prepared the trial balance, listing all of the general ledger accounts, as well as their corresponding debit
and credit balances.
Prepared the adjustments and adjustment explanations, making corrections to the accounts to match
revenues and expenses with the correct period. We've also corrected any errors or omissions that were
made.
Prepared the adjusted trial balance, which simply involves taking the trial balance and accounting for all of
the adjustments that we made. Similar to the trial balance, the adjusted trial balance is a listing of all of the
general ledger accounts and their corresponding debit or credit balances.
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View this spreadsheet in Google Sheets
Again, here is the information from the adjusted trial balance, reflecting the permanent accounts--assets,
liabilities, and equity. Equity is the key piece.
2b. Income Statement
We will also need to pull some information off of the income statement in order to prepare the statement of
changes in owner's equity.
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View this spreadsheet in Google Sheets
2c. Statement of Changes in Owner's Equity
We can use the information from the adjusted trial balance and income statement to identify the accounts and
amounts needed to prepare the statement of changes in owner's equity:
Retained earnings (beginning balance): $200,000
Owner drawings: $10,000
Net income: $86,500
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View this spreadsheet in Google Sheets
We are ready to prepare a detailed statement of changes in owner's equity for Legacy Realty, using this
information captured from the adjusted trial balance and income statement information.

FORMULA TO KNOW
Statement of Changes in Owner's Equity

STEP BY STEP
1. The first line is the beginning balance, January 1, in owner's equity, which is retained earnings in the
amount of $200,000.
2. Next, we're going to add any owner investments or net income. In this case, Legacy Realty has net
income of $86,500. There were no owner investments during the period, so the only item we need to
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Page 85
add is net income. We subtotal the beginning balance and net income to get $286,500.
3. Then, we need to take out any subtractions for owner's draws, meaning any money the owners pulled
out of the business, as well as any net loss. Well, we know that Legacy Realty had net income, so the
only item we need to subtract are the owner's drawings, shown in the adjusted trial balance. We
subtract owner draws to get to the Legacy Realty's ending balance on December 31, 2022, of $276,500
in owner's equity.
View this spreadsheet in Google Sheets
Just as with other financial statements, we started the statement of changes in owner's equity with the header,
which includes:
Business name, Legacy Realty Partners
Name of Statement ("Statement of Changes in Owner's Equity")
The statement "For the period ending December 31, 2022." Similar to the income statement, this line is
needed because this is an activity-based statement.


WATCH
SUMMARY
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 86
Today we introduced our case study company called Legacy Realty, that is in the business of owning
and leasing their own rental properties. We walked through an example of preparing a statement of
changes in owner's equity, which details the owner activity for a period. We pulled some information
from the adjusted trial balance and the income statement in order to create this statement.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

FORMULAS TO KNOW
Statement of Changes in Owner's Equity
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 87
Balance Sheet
by Sophia

WHAT'S COVERED
This lesson will cover the topic of the balance sheet. Specifically, this lesson will cover:
1. Balance Sheet
2. Balance Sheet: Example
1. Balance Sheet
Before we begin our discussion of the balance sheet, it is important to define financial statements, which are
reports providing financial information about a business at a given time. It follows that a balance sheet is a
financial statement that provides information about the assets, liabilities, and equity of a business at a given
time.
Think of the balance sheet as the business position. It captures a moment in time, rather than spanning a
period, and it is the only financial statement that is prepared at a specific date.

HINT
The balance sheet is not period-based; it reflects a specific point in time.
The balance sheet details a business's resources, meaning assets, or the resources owned or available,
liabilities owed to others, and the net difference on a cumulative basis, which is the equity.
The accounting equation is a fundamental premise in accounting, which states that a company's assets will be
equal to the sum of its liabilities and its equity. This also happens to be the balance sheet formula; the
accounting equation and the balance sheet formula are the same.

FORMULA TO KNOW
Accounting Equation
Let's examine the formula itself in more detail:
Assets are the physical or non-physical resources owned by an organization that have economic value.
These are the available resources.
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Page 88
Liabilities are the debts and other financial responsibilities of an organization, meaning the monies owed to
others, or any obligations of a financial nature.
Equity is the remaining value once liabilities are subtracted from assets. Equity is the net difference on a
cumulative basis.

TERMS TO KNOW
Financial Statements
Reports providing financial information about a business at a given time.
Balance Sheet
A financial statement that provides information about the assets, liabilities and equity of a business at a
given time.
Accounting Equation
A fundamental premise in accounting which states that a company's assets will be equal to the sum of
its liabilities and its equity (Assets = Liabilities + Equity).
Assets
Physical or non-physical resources owned by an organization that have economic value.
Liabilities
Debts and other financial responsibilities of an organization.
Equity
The remaining value once liabilities are subtracted from assets.
2. Balance Sheet: Example
Let's look at an example of a balance sheet, breaking out its component parts:
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View this spreadsheet in Google Sheets
Balance Sheet
Description
Component
The header includes the company name, the title "Balance Sheet," and then, because it is at
Header
a specific point in time, it has a line that states "As of..."--in this case, "As of December 31,
2022."
We start with the current assets--cash, accounts receivable, supplies, and prepaid insurance.
Assets
Next, we detail the long-term assets, which in this case are the buildings. Both current and
long-term assets are added together to provide the total assets.
The next section comprised liabilities, starting with short-term liabilities--in this case, the
accounts payable. Next are the long-term liabilities, which are the notes payable. So, similar
Liabilities
to the assets, the liabilities on the balance sheet are broken up into short-term and longterm, and again, we sum the short-term and long-term to arrive at the total liabilities.
In this example, the equity items include an owner's investment and retained earnings, which
Equity
are earnings kept in the business and not distributed to owners. We subtract out the
withdrawals to provide the total equity.

BIG IDEA
Finally, we total up the liabilities and equity, because remember, just like the accounting equation, the
balance sheet formula is the same: assets equal liabilities plus equity. Therefore, if we have total assets of
$156,000, you can also see that we have total liabilities and equity of $156,000--everything balances.


WATCH
SUMMARY
Today we learned about the balance sheet, which is a financial statement that provides information
about the assets, liabilities, and equity of a business at a given time. It's important to note that the
balance sheet provides information at a specific date. We also learned about the balance sheet formula
and the accounting equation: assets equals liabilities plus equity. Lastly, we explored a comprehensive
balance sheet example.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.
© 2026 SOPHIA Learning, LLC. SOPHIA is a registered trademark of SOPHIA Learning, LLC.
Page 91

TERMS TO KNOW
Accounting Equation
A fundamental premise in accounting which states that a company's assets will be equal to the sum of its
liabilities and its equity.
Assets
Physical or non-physical resources owned by an organization that have economic value.
Balance Sheet
A financial statement that provides information about the assets, liabilities and equity of a business at a
given time.
Equity
The remaining value once liabilities are subtracted from assets.
Financial Statements
Reports providing financial information about a business at a given time.
Liabilities
Debts and other financial responsibilities of an organization.

FORMULAS TO KNOW
Accounting Equation
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Page 92
Preparing Balance Sheets
by Sophia

WHAT'S COVERED
This lesson will cover how to prepare a balance sheet. Specifically, this lesson will cover:
1. Balance Sheet: A Review
2. Preparing a Balance Sheet: Example
2a. Adjusted Trial Balance
2b. Income Statement
2c. Balance Sheet
1. Balance Sheet: A Review
In review, a balance sheet is a financial statement that provides information about the assets, liabilities, and
equity of a business at a given time.
The balance sheet is the business's position. It captures a moment in time, rather than spanning a period, and it
is the only financial statement that is prepared at a specific date.
The balance sheet details a business's resources, meaning assets, or the resources owned or available,
liabilities owed to others, and the net difference on a cumulative basis, which is the equity.
The accounting equation is a fundamental premise in accounting, which states that a company's assets will be
equal to the sum of its liabilities and its equity. This also happens to be the balance sheet formula; the
accounting equation and the balance sheet formula are the same.

FORMULA TO KNOW
Accounting Equation
Keep in mind, this formula will guide us as we walk through an example of preparing a balance sheet, in the
next section.
2. Preparing a Balance Sheet: Example
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Let's get started on preparing our balance sheet.
2a. Adjusted Trial Balance
The starting point for preparing the balance sheet is the adjusted trial balance, which we can pull from the trial
balance worksheet, below.
As you can see, we've already gone through the steps of preparing our trial balance, making our adjustments,
and preparing the adjusted trial balance, which is what we used to build the financial statements. Note the detail
of all of the ledger accounts in the adjusted trial balance.
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2b. Income Statement
However, in order to prepare our balance sheet, we also need to have our income statement information,
because we need to know how much net income there is for the year and plug this information into our equity.
Therefore, here is all the raw information that we need to prepare the balance sheet--the adjusted trial balance,
as well as the income statement.
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2c. Balance Sheet
Now that we've gathered the information that we need from the trial balance worksheet, let's start pulling it into
our balance sheet.
Let's refer back to our adjusted trial balance information, below. Here are all of our permanent accounts, which
represent all of our assets, liabilities, and equity. In this case, the permanent accounts that we need to prepare
the balance sheet are:
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Buildings
Accumulated Depreciation - Buildings
Accounts Payable
Notes Payable
Retained earnings, 1/1/22
Owner's Drawings
We'll start with the current assets--cash, accounts receivable, supplies, and prepaid insurance. Then, we will
input the long-term assets, which, in this case, are buildings and accumulated depreciation, which total $39,000.
Adding together our current assets and long-term assets, we arrive at total assets in the amount of $173,500.
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Now, recall the accounting equation/balance sheet formula: Assets equal liabilities plus equity. Therefore, the
next step is to input our liabilities. Short-term liabilities are accounts payable, and long-term liabilities are notes
payable, which sum to total liabilities of $30,000.
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The final piece is equity, starting with retained earnings of $12,000, pulled from the adjusted trial balance. The
next equity detail comes from the income statement in the form of net income for the period, in the amount of
$133,500. We also have owner drawings, from the adjusted trial balance, of $2,000; we need to subtract those
out for our total equity.
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Finally, we need to add total liabilities and equity. As you can see, we have total assets of $173,500, and we also
have total liabilities and equity of $173,500. They are equal. Our accounting equation balances, as does our
balance sheet formula.
The final balance sheet would look like:
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
BIG IDEA
Remember, a balance sheet always starts with a header, which includes the business name, "Balance
Sheet," and "As of" a specific date, which, in this case, is December 31, 2022.


WATCH
SUMMARY
Today we covered a review of the balance sheet, which is a financial statement that provides
information about the assets, liabilities, and equity of a business at a given time. We also explored a
comprehensive example of preparing a balance sheet, making sure that at the end, our total assets
were equal to the sum of our liabilities and equity.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

FORMULAS TO KNOW
Accounting Equation
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Case Study: Balance Sheet
by Sophia

WHAT'S COVERED
This lesson will cover the preparation of a balance sheet in the context of a case study, using a
hypothetical business. Specifically, this lesson will cover:
1. Case Study: Legacy Realty
2. Case Study: Balance Sheet
2a. Trial Balance Worksheet
2b. Statement of Changes in Owner's Equity
2c. Balance Sheet
1. Case Study: Legacy Realty
The subject company for our case study is called Legacy Realty. Legacy Realty is a sole proprietorship, which is
a type of company that is owned by one single individual, and where that individual and the business are legally
treated as the same.
The purpose of Legacy Realty as a business is to own, lease, and manage its own rental properties. It purchases
houses and condominiums and leases them out to tenants. They also perform their own management of their
units, making repairs, performing maintenance, and collecting rent. Legacy Realty is located in Washington DC,
and they have a small staff of five people.
Legacy Realty
Type of company
Sole proprietorship
Business purpose
Own, lease, and manage rental properties
Business location(s)
Washington, D.C.
Staff of 5 people
Legacy Realty needs a balance sheet to provide information about the business position. It is prepared at a
moment in time, rather than covering a period of time; it is the only financial statement that is made at a specific
date. The balance sheet informs about a business's resources, detailing the resources that are available or
owned, in the case of assets, as well as the resources that are owed to others, in the case of liabilities. The net
difference, then, on a cumulative basis, is equity, which is also detailed on the balance sheet.
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Remember the balance sheet formula: assets equal liabilities plus equity.

FORMULA TO KNOW
Accounting Equation
2. Case Study: Balance Sheet
In order to begin preparing the balance sheet, we need to start with some information from the trial balance
worksheet, specifically from the adjusted trial balance.
2a. Trial Balance Worksheet
As you can see, we've prepared the trial balance, listing all of the general ledger accounts, as well as their
corresponding debit and credit balances. We've also prepared the adjustments and adjustment explanations,
making corrections to the accounts to match all revenues and expenses with the correct period. We've also
corrected any errors or omissions may have been made throughout the accounting period and recording
process.
Using this information, we have also prepared the adjusted trial balance, accounting for all of those adjustments
that were made. Similar to the trial balance, the adjusted trial balance is a listing of all of the general ledger
accounts, as well as the corresponding debit or credit balances within those accounts.
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This adjusted trial balance is going to be the source for the financial statements, containing all the information
needed to create those statements for Legacy Realty.
2b. Statement of Changes in Owner's Equity
To prepare a balance sheet, we will also need to consider equity, which can be determined from information in
the income statement or statement of changes in owner's equity. For this case study, we'll use the statement of
changes in owner's equity.
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2c. Balance Sheet
Now we are ready to prepare the balance sheet for Legacy Realty. We need to pull the information from all of
the permanent accounts from the adjusted trial balance--the assets, liabilities, and equity.
Starting with current assets, we list the cash, accounts receivable, supplies, and prepaid insurance, which are
the total current assets. We also break out the long-term assets, which, in this case, comprise land, buildings,
and the accumulated depreciation for those buildings. Therefore, total current assets plus total long-term assets
equal total assets of $616,500.
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Now we can move on to liabilities, starting with short-term liabilities. Short-term liabilities include accounts
payable and unearned revenue. Similar to how assets are broken out by current and long-term, liabilities are
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also broken out by short-term and long-term. In this case, we only have a notes payable as long-term liabilities.
Adding short-term and long-term liabilities provides total liabilities of $340,000.
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Now, remember that the balance sheet formula is assets equals liabilities plus equity. Therefore, we now have
to add in our equity. We pull equity information from the statement of changes in owner's equity. From this
statement, we pull in the ending balance in the owner's capital account, at the end of the year, of $276,500.
This captures the beginning balance and any net income or loss, as well as any drawings or contributions that
may have been made by the owners.
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Finally, we total up our liabilities and equity, which, in this case, is $616,500. It's important to perform a check: do
assets equal liabilities plus equity? They do, so our balance sheet balances.
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View this spreadsheet in Google Sheets
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
BIG IDEA
We always start with the header, which includes the company name, then "Balance Sheet," and the line "As
of December 31, 2022." It is important to note that this line is different than the one on the income statement
and statement of changes in owner's equity.


WATCH
SUMMARY
Today we discussed our case study company called Legacy Realty, which is in the business of owning
and leasing their own rental properties. We walked through an example of preparing a balance sheet,
starting with our adjusted trial balance and statement of changes in owner's equity--the two sources we
used in order to create our balance sheet.
Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR
TERMS OF USE.

FORMULAS TO KNOW
Accounting Equation
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Terms to Know
Accounting Equation
A fundamental premise in accounting which states that a company's assets will be equal to
the sum of its liabilities and its equity.
Adjusting Entry
An entry that is made at the end of an accounting period to report any unrecognized income
or expenses for that period.
Assets
Physical or non-physical resources owned by an organization that have economic value.
Balance Sheet
A financial statement that provides information about the assets, liabilities and equity of a
business at a given time.
Closing Entry
An entry made at the end of an accounting period that is used to close out a temporary
account.
Drawing Account
An account that keeps a record of money taken out of the business by its owner or owners.
Equity
The remaining value once liabilities are subtracted from assets.
Expenses
Costs associated with operating or maintaining a company.
Financial Statements
Reports providing financial information about a business at a given time.
Income statement
A financial statement that provides information about the revenue, expenses, and net profit
or loss of a business for a given time period.
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Liabilities
Debts and other financial responsibilities of an organization.
Revenue
Earnings from interest or from the sale of goods or services.
Statement of Changes in Owner's Equity
A financial statement that provides information about changes to the equity of a business for
a given time period.
Temporary Accounts
Accounts whose balances are closed at the end of an accounting period and reopened at the
beginning of the next period.
Trial Balance
A list of the debit and credit balances of all of the general ledger accounts at a given time.
Formulas to Know
Accounting Equation
Income Statement (Multi-Step)
Income Statement (Single Step)
Statement of Changes in Owner's Equity
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