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Financial Statements
Financial Statements
Income statement Statement of owner’s equity Balance sheet Statement of cash flows
Income Statement
Summary of an entity’s revenues, expenses, and net income or net loss for a specific period
Revenues - Expenses Net Income: Revenues > Expenses Net Loss: Expenses > Revenues
Net income is carried to the
retained earnings statement
Income Statement
Statement of Owner’s Equity
Summary of changes in an entity’s owner’s equity during a specific period
Beginning owner’s equity+ Owner’s investments+ Net income- Net loss- Owner’s withdrawalsEnding owner’s equity
Retained Earnings Statement
from the income statement
to the balance sheet
Balance Sheet
Reports the entity’s assets, liabilities, and owner’s equity as of a specific date
Assets = Liabilities + Owner’s Equity
This amount is compared to the net cash flows on the statement of cash flows
From the retained earnings statement
Balance Sheet
Statement of Cash Flows
Reports cash receipts and cash payments during a specific period
This amount should match Cash on the balance sheet.
Statement of Cash Flows
Debits & Credits
12
Double Entry System
Record dual effects of each transaction
Each transaction affects at least two accounts
Each transaction is recorded with at least One debit One credit
Total debits must equal total credits
13
Account Account NameName
(Left (Left Side) Side) DebitDebit
(Right (Right Side) Side)
CreditCredit
Simple tool for analyzing and determining the balance in a given account
T-Account
14
Debit Credit
Assets
+
-
Rules of Debit and Credit
Liabilities Equity= +Debit Credit - +
Debit Credit - +
15
Rules of Debit and Credit
Owner’s EquityDebit Credit - +
Revenues
- +
Debit Credit
Owner’s Capital
Debit Credit - +
Owner’s Withdrawa
lsDebit Credit +
-Expenses
Debit Credit +
-
16
Liabilities EquityAssets = +
Normal Balances
Debit Credit+ -
Debit Credit- +- +
Debit Credit- +- +
NormalBalance
NormalBalance
NormalBalance
17
++
Owner’s Equity
Normal Balances
Debit Credit- +
NormalBalance
Owner’s Equity
Owner’s Equity
Debit Credit+ -
NormalBalance
Owner’s Withdraw
als
Owner’s Withdraw
als
__Debit Credit- +
NormalBalance
RevenuesRevenues__
ExpensesExpenses
Debit Credit+ -
NormalBalance
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General Journal Entry
Journal Page 1
Date Description Debit Credit
Jul 1 Cash 45,000
Lange, Capital 45,000
Investment from owner
Accounts AffectedAccounts AffectedAccounts AffectedAccounts Affected
Dollar amount of Dollar amount of debits and creditsdebits and creditsDollar amount of Dollar amount of debits and creditsdebits and credits
Explanation of Explanation of transactiontransaction
Explanation of Explanation of transactiontransaction
Transaction Transaction DateDate
Transaction Transaction DateDate
On November 1, 2007, Chris Clark organizes a corporation that will be
known as NetSolutions.
a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation.
Nov 1 Cash 25,000.00
Stockholder’s Equity 25,000.00
b. NetSolutions exchanged $20,000 for land.
Land 20,000.00
Cash 20,000.00
c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account).
Supplies 1,350.00
Accounts Payable 1,350.00
dd. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.
Cash 7,500.00
Fees Revenue 7,500.00
e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Wages Expense 2,125.00
Cash 3,650.00
Rent Expense 800.00
Utilities Expense 450.00
Miscellaneous Expense 275.00
f. NetSolutions paid $950 to creditors during the month.
Accounts Payable 950.00
Cash 950.00
g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.
Supplies Expense 800.00
Supplies 800.00
h. At the end of the month, NetSolutions pays $2,000 to stockholder (Chris Clark) as dividends.
Dividends 2,000.00
Cash 2,000.00
28
Posting
Posting – copying amounts from the journal to the ledger
Periodically, journal entries are posted to ledger accounts to determine balances in each account
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Trial Balance
List of all accounts with their balances
Trial Balance
1-30
NetSolutions
Trial Balance
For the Month Ended November 30, 2007
Cash 5,900.00
Supplies 550.00
Land 20,000.00
Accounts Payable 400.00
Capital Stock 25,000.00
Dividends 2,000.00
Fees Earned 7,500.00
Wages Expense 2,125.00
Rent Expense 800.00
Supplies Expense 800.00
Utilities Expense 450.00
Miscellaneous Expense 275.00
Totals $ 32,900.00 $ 32,900.00
Net income is carried to the
retained earnings
statement
Income Statement
Retained Earnings Statement
from the income statement
to the balance sheet
This amount is compared to the net cash flows on the statement of cash flows
From the retained earnings statement
Balance Sheet
This amount should match Cash on the balance sheet.
Statement of Cash Flows
More Transactions
Dec. 1 NetSolutions paid rent for December, $800. The company from which NetSolutions is renting its store space requires the payment of rent on the first of each month, rather than at the end of the month.
Dec 1 Rent Expense 52 800 00 Cash 11 800 00
Paid rent for
December.
NetSolutions received an offer from a local retailer to rent (for $120 per month) the land purchased on November 5. The retailer plans to use the land as a parking lot for its employees and customers. NetSolutions agreed to rent the land to the retailer for three months, with the rent payable in advance.
1Cash 11 360 00
Unearned Rent 23 360 00
Received advance
payment for
three months’
rent on land.
Dec. 4 NetSolutions purchased office equipment on account from Executive Supply Co. for $1,800.
4 Office Equipment 181 800 00
Accounts Payable 21 1 800 00
Purchased office
equipment on
account.
Dec. 6NetSolutions paid $180 for a newspaper advertisement.
6 Miscellaneous Expense 59 180 00
Cash 11 180 00
Paid for newspaper
ad.
Dec. 11NetSolutions paid creditors $400.
11 Accounts Payable 21 400 00
Cash 11 400 00
Paid creditors on
account.
Dec. 13 NetSolutions paid a receptionist and part-time assistant $950 for two weeks’ wages.
13 Wages Expense 51 950 00
Cash 11 950 00
Paid two weeks’
wages.
Dec. 16 NetSolutions received $3,100 from fees earned for the first half of December.
16 Cash 113 100 00
Fees Earned 41 3 100 00
Received fees
from customers.
Dec. 16 Fees earned on account totaled $1,750 for the first half of December.
16 Accounts Receivable 12 1 750 00
Fees Earned 41 1 750 00
Recorded fees
earned on
account.
Dec. 20 NetSolutions paid $900 to Executive Supply Co. on the $1,800 debt owed from the December 4 transaction.
20 Accounts Payable 21 900 00
Cash 11 900 00
Paid part of
amount owed to
Executive Supply
Co.
Dec. 21 NetSolutions received $650 from customers in payment of their accounts.
21 Cash 11 650 00
Accounts Receivable 12 650 00
Received fees
from customers
on account.
Dec. 23 NetSolutions paid $1,450 for supplies.
23 Supplies 14 1 450 00
Cash 11 1 450 00Purchased
supplies.
Dec. 27 NetSolutions paid the receptionist and part-time assistant $1,200 for two weeks’ wages.
27 Wages Expense 51 1 200 00
Cash 11 1 200 00
Paid two weeks’
wages.
Dec. 31 NetSolutions paid $310 for telephone charges for the month.
31 Utilities Expense 54 310 00
Cash 11 310 00
Paid telephone
charges.
Dec. 31 NetSolutions paid $225 for electric usage for the month.
31 Utilities Expense 54 225 00
Cash 11 225 00
Paid for electric
usage.
Dec. 31 NetSolutions received $2,870 from fees earned for the second half of December.
31 Cash 11 2 870 00
Fees Earned 41 2 870 00
Received fees
from customers.
Dec. 31 NetSolutions earned $1,120 on account for the second half of December.
31 Accounts Receivable 12 1 120 00
Fees Earned 41 1 120 00
Recorded fees
earned on
account.
Dec. 31 NetSolutions paid dividends of $2,000 to stockholders.
31 Dividends 33 2 000 00
Cash 11 2 000 00
Paid dividends to
stockholders.
Trial Balance
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