Financial Statements for a Sole Proprietorship

1
Chapter 9

• Financial Statements for a Sole Proprietorship

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Objectives

• Students will be able to
• Explain the purpose of the income statement
• Prepare an income statement
• Explain the purpose of a statement of changes in
  owners equity
• Prepare a statement of changes in owners equity
• Explain the purpose of the balance sheet

3

• Explain and compute the return on sales
  percentage
• Calculate liquidity ratios and explain their
  function
• Prepare a balance sheet
• Define the accounting terms introduced in this
  chapter

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Financial Statements

• 7th step in the accounting cycle
• Important to evaluate profits or losses
• Prepared to summarize the changes resulting from
  business transactions that occur during an
  accounting period

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Financial Statements

• The primary financial statements prepared for a
  sole proprietorship are the income statement and
  the balance sheet
• Statement of owners equity is a third statement

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The Income Statement

• Reports net income or net loss for the period
• Difference between total revenue and total
  expenses
• Main purpose is to provide a report of the
  revenue earned and expenses incurred
• Also called a profit and loss statement or an
  earnings statement

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The Income Statement

• Sections
• Heading
• Revenue
• Expenses
• Net income or net loss

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Heading

• Name of business (who)
• Name of report (what)
• The period covered (when)

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The Revenue Section

• Write revenue on the first line to the left
• Enter the revenue account names beginning on the
  second line, indent
• Enter the balance of the revenue accounts
• if more than one revenue account write total
  revenue on a separate line and indent

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The Expense Section

• Write expenses to the left
• Write names of expense accounts, indent
• Write balances
• Draw single line
• Write total expenses, indent
• Add balance

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The Net Income Section

• Draw a single line under total expenses amount
• Subtract expenses from revenue
• Write the words net income to the left
• Write net income in second amount column
• If the amount of net income matches the amount
  shown on the work sheet, draw a double line

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Showing a Net Loss

• If expenses are greater than revenue, there is a
  net loss
• Subtract revenue from expenses
• Enter net loss amount

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The Income Statement
14

• Problem 9-4

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Statement of Changes in Owners Equity

• Summarizes changes in the owners capital account
  as a result of business transactions during the
  period
• Prepared at the end of the period
• Heading
• Who business name
• What name of document (statement of owners
  equity)
• When period covered

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Statement of Changes in Owners Equity

• The information to prepare this statement is
  found in three places
• The work sheet
• The income statement
• The owners capital account in the general ledger

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Statement of Changes in Owners Equity
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Statement of Changes in Owners Equity for an
Ongoing Business

• There are 2 ways to determine the owners capital
  account balance at the beginning of the period
• Look at the ledger
• Subtract the additional investments from the
  account balance shown on the worksheet

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• Problem 9-5
• Problem 9-6 steps 1-3

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The Balance Sheet
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The Balance Sheet

• Report of balances in all asset, liability, and
  owners equity accounts at the end of a period
• Assets Liabilities Owners Equity
• Amounts in left column, totals in right column
• Unless only one account for section, then put in
  right column

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Return on Sales

• Determine the portion of each sales dollar that
  represents profit

Net Income 1,150 net income
.434 or 43.4
Sales 2,650 sales
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Current Ratio

• Relationship between current assets and current
  liabilities.

Current Assets 37,775 Current
Liabilities 11,725
Current Ratio 3.22 or 3.21
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Quick Ratio

• The relationship between short term assets and
  current liabilities.

Cash and Receivables 22,575 Current
Liabilities 11,725
Quick Ratio 1.921
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• Problem 9-7 due at END OF PERIOD, no exceptions!!