Financial Statement Analysis, (FIN-621)
Lesson-8
Lesson-8
ACCOUNTING CYCLE/PROCESS
(Continued)
Pre-paid costs e.g. Pre-paid rent, will be recorded as follows:
Date
Description
L/F
Dr.
Prepaid Rent
Cr.
12,000
Cash Account
12,000
Rent paid in advance
Pre-paid costs e.g. Pre-paid rent, will be recorded as follows:
Date
Description
L/F
Dr.
Rent Expense
Cr.
1,000
Prepaid Rent
1,000
Recording rent expense
Pre-paid costs e.g. Pre-paid Insurance will be recorded as follows:
Date
Description
L/F
Dr.
Prepaid Insurance
Cash Account
Insurance paid in advance
12,000
12,000
Pre-paid costs e.g. Pre-paid Insurance will be recorded as follows:
Date
Description
L/F
Dr.
Insurance Expense
Cr.
Cr.
1,000
Prepaid Insurance
1,000
Recording Insurance expense
g) Preparing Financial Statements
Now we come to the all-important step of preparing Financial Statements from
Accounting Records. Income Statement is prepared from Adjusted Trial Balance, first. Then
Statement of Owner’s equity between Income Statement and Balance Sheet is prepared. For this,
Net profit/loss in Income Statement is added to/ subtracted from owner’s equity in “Owner’s
equity Statement”, and the total/net is then transferred to Balance Sheet. After the preparation of
Balance Sheet, the fourth Financial Statement i.e. Cash flow Statement is prepared separately.
As a practical illustration, let us prepare these Financial Statements.
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Financial Statement Analysis, (FIN-621)
Lesson-8
Income Statement
For the period ending August 31, 2006
Particulars
Revenues
Sales Commission earned.
Expenses
Advertising expenses.
Salaries expenses.
Telephone expenses.
Depreciation expense: building
Depreciation expense: office equipment
Rs.
Rs.
10,640
645
7,400
400
150
45
8,640
Net Income.
2,000
The revenue and expenses shown in the income statement are taken directly from the company’s
adjusted trial balance. Our measurement of net income is not absolutely accurate or precise,
because of the assumptions and estimates in the accounting process. An income statement has
certain limitations. Remember that the amount shown for depreciation expense or based on
estimates of the useful lives of the company’s building and office equipment. Also the income
statement includes only those events that have been evidence by business transactions.
Alternative titles for the income statement include earnings statement, statement of operations,
and profit and loss statement. However, income statement is by far the most popular term for this
important financial statement. In summary, we can say that an income statement is used to
summaries the operating results of business by matching the revenue earned during a given time
period with the expenses incurred in obtaining that revenue.
Note: This is case of service business, and sole proprietorship. In the case of Merchandise
& Manufacturing business:
Net Income=Sales–Cost of Goods sold–Other expenses.
ii) Owner’s equity Statement
Owner’s equity which was Rs.180, 000 on July 31, 2006 increases by Rs.2000 due
to profitable operations during the month of August, 2006. Net income is transferred to owner’s
equity statement, which is further transferred to Balance Sheet. Correspondingly, there would be
either increase in Assets (Left) side of the Accounting Equation (or Balance Sheet), or decrease in
Liabilities (Right) side, to maintain balance.
Statement of Owner’s equity summarizes increase/decrease in owner’s equity during
accounting period. It is increased due to profit and additional investment by the owner. It is
decreased due to loss and withdrawal/drawing by the owner.
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Financial Statement Analysis, (FIN-621)
Lesson-8
Statement of Owner’s equity for the month of August, 2006
Particulars
Rs.
Khizr, capital July 31, 2006
180,000
Add: Net income for August, 2006
2,000
Additional investment by owner
4,000
Sub total
186,000
Less withdrawal/drawing by owner
3,000
Owner’s equity August 31, 2006
183,000
III. Balance Sheet
The balance sheet lists the amounts of the company’s assets, liabilities, and owner’s
equity at the end of accounting period. The balances of the assets and liability accounts
are taken directly from the adjusted trial balance. Cash is listed first among the assets. It
is often followed by such asset as marketable securities, short-term notes receivable,
accounts receivable, inventories, and supplies. These are the most common examples of
current assets. The term “current assets” includes cash and those assets that will be
quickly converted to cash or used up in operations
.
Khizr Property Dealer
Balance Sheet
As on August 31,2006
Assets
Rs.
Cash
Accounts Receivables
Land
Building
Less Accumulated Dep:
Office Equipment
Less Accumulated Dep:
TOTAL
36,000
150
5,400
45
Rs.
Liabilities & Equity
Rs.
16,105
19,504
130,000
Accounts Payable
Owner’s equity
23,814
183,000
TOTAL
206,814
35,850
5,355
206,814
-
Owner’s equity obtained from Owner’s equity statement
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