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Comprehensive Steps for Financial Statements Preparation

Learn to create financial statements efficiently using worksheets and entries for accurate accounting. Follow the steps for income statement, owner’s equity statement, and balance sheet preparation.

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Comprehensive Steps for Financial Statements Preparation

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  1. CHAPTER SIX FINANCIAL STATEMENTS AND THE CLOSING PROCESS

  2. WORK SHEET • Used for three major end-of-period activities: • journalizing adjusting entries • preparing financial statements • journalizing closing entries

  3. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 From this work sheet, we can prepare the financial statements. Ppd. Ins. 175 175 3600 Del. Eq. 3600 100 A. D.-Del. Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay. J J, Cap. 2000 2000 150 J J, Drawing 150 Del. Fees 2150 2150 700 Wages Exp. 700 200 Rent Exp. 200 Sup. Exp 60 60 50 Tel. Exp. 50 Ins. Exp. 25 25 Depr. Exp. 100 100 1135 2150 4965 3950 6100 6100 1015 1015 2150 4965 2150 4965

  4. PREPARING FINANCIAL STATEMENTS • 1st: Prepare the Income Statement. • 2nd: Prepare the Statement of Owner’s Equity. • 3rd: Prepare the Balance Sheet.

  5. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Heading should contain 3 lines: 1. Company Name 2. Statement Title 3. Time period covered or date

  6. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Revenues are shown first.

  7. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 Revenue 3600 Del. Eq. 3600 100 A. D.-Del. Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay. J J, Cap. 2000 2000 150 J J, Drawing 150 Del. Fees 2150 2150 700 Wages Exp. 700 200 Rent Exp 200 Sup. Exp. 60 60 50 Tel. Exp. 50 Ins. Exp. 25 25 Depr. Exp. 100 100 1135 2150 4965 3950 6100 6100 1015 1015 2150 4965 2150 4965

  8. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Delivery Fees $2,150 Top amount in each column will include “$”.

  9. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Delivery Fees $2,150 When there is only one revenue account, “Total Revenues” is not computed or shown.

  10. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Delivery Fees $2,150 Expenses: Expenses are shown next.

  11. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 Expenses 3600 Del. Eq. 3600 100 A. D.-Del. Eq. 100 Accts Pay 1800 1800 50 50 Wages Pay. J J, Cap. 2000 2000 150 J J, Drawing 150 Del. Fees 2150 2150 700 Wages Exp. 700 200 Rent Exp. 200 Sup. Exp. 60 60 50 Tel. Exp. 50 Ins. Exp. 25 25 Depr. Exp. 100 100 1135 2150 4965 3950 6100 6100 1015 1015 2150 4965 2150 4965

  12. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Delivery Fees $2,150 Expenses: Wages Expense $ 700 First amount in the column is shown with a “$”.

  13. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Delivery Fees $2,150 Expenses: Wages Expense $ 700 Rent Expense 200 Supplies Expense 60 Telephone Expense 50 Insurance Expense 25 Depreciation Expense - Delivery Eq. 100 Expenses are listed in either: account number order OR descending order by dollar amount.

  14. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Delivery Fees $2,150 Expenses: Wages Expense $ 700 Rent Expense 200 Supplies Expense 60 Telephone Expense 50 Insurance Expense 25 Depreciation Expense - Delivery Eq. 100 Single underline indicates addition or subtraction.

  15. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Next, expenses are totaled. Delivery Fees $2,150 Expenses: Wages Expense $ 700 Rent Expense 200 Supplies Expense 60 Telephone Expense 50 Insurance Expense 25 Depreciation Expense - Delivery Eq. 100 Total Expenses 1,135

  16. Jessica Jane’s Campus DeliveryIncome StatementFor Month Ended June 30, 20-- Revenues: Delivery Fees $2,150 Expenses: Wages Expense $ 700 Rent Expense 200 Supplies Expense 60 Telephone Expense 50 Insurance Expense 25 Depreciation Expense - Delivery Eq. 100 Total Expenses 1,135 Net Income $1,015

  17. Jessica Jane’s Campus DeliveryStatement of Owner’s EquityFor Month Ended June 30, 20-- Jessica Jane, capital, June 1, 20-- Statement starts with the Capital balance as of the beginning of the accounting period.

  18. Jessica Jane’s Campus DeliveryStatement of Owner’s EquityFor Month Ended June 30, 20-- Jessica Jane, capital, June 1, 20-- $2,000 Instead of showing Revenue increasing & Expenses decreasing the Owner’s Equity, this statement uses the net effect (Net Income/Loss) from the Income Statement.

  19. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 3600 Del. Eq. 3600 100 A. D.-Del Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay. 2000 2000 J J, Cap. 150 J J, Drawing 150 Del. Fees 2150 2150 Be careful!! Capital from the work sheet may not be the beginning capital balance. It is the beginning balance PLUS any additional investments. 700 Wages Exp 700 200 Rent Exp 200 Sup. Exp 60 60 50 Tel. Exp 50 Ins. Exp 25 25 Depr. Exp 100 100 1135 2150 4965 3950 6100 6100 1015 1015 2150 4965 2150 4965

  20. Jessica Jane’s Campus DeliveryStatement of Owner’s EquityFor Month Ended June 30, 20-- Jessica Jane, capital, June 1, 20-- $2,000 Since Jessica made no additional investments this period, we can use the capital balance from the work sheet.

  21. Jessica Jane’s Campus DeliveryStatement of Owner’s EquityFor Month Ended June 30, 20-- Jessica Jane, capital, June 1, 20-- $2,000 Next we add in the Net Income/Loss from the Income Statement or from the work sheet.

  22. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 3600 Del. Eq. 3600 100 A. D.-Del Eq. 100 Net Income is found in the Income Statement debit column and the Balance Sheet credit column. Accts. Pay 1800 1800 50 50 Wages Pay 2000 2000 J J, Cap 150 J J, Drawing 150 Del. Fees 2150 2150 700 Wages Exp 700 200 Rent Exp. 200 Sup. Exp. 60 60 50 Tel. Exp. 50 Ins. Exp. 25 25 Depr. Exp. 100 100 1135 2150 4965 3950 6100 6100 1015 Net Income 1015 2150 4965 2150 4965

  23. Jessica Jane’s Campus DeliveryStatement of Owner’s EquityFor Month Ended June 30, 20-- Jessica Jane, capital, June 1, 20-- $2,000 $1,015 Net Income for June Less: Withdrawals for June Now we will go to the work sheet for the Drawing account.

  24. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 3600 Del. Eq. 3600 100 A. D.-Del. Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay. 2000 2000 J J, Cap. 150 J J, Drawing 150 Del. Fees 2150 2150 700 Wages Exp. 700 200 Rent Exp 200 Drawing account tells us the amount of assets Jessica has withdrawn from business for personal use. Sup. Exp 60 60 50 Tel. Exp 50 Ins. Exp 25 25 Depr. Exp 100 100 1135 2150 4965 3950 6100 6100 1015 Net Income 1015 2150 4965 2150 4965

  25. Jessica Jane’s Campus DeliveryStatement of Owner’s EquityFor Month Ended June 30, 20-- Jessica Jane, capital, June 1, 20-- $2,000 Net Income for June $1,015 150 Less: Withdrawals for June Increase in Capital 865 Jessica Jane, capital, June 30, 20-- $2,865 Lastly, we calculate the ending Capital balance and double rule the statement.

  26. Liabilities and Owner’s Equity are shown BELOW the Asset section. This is the form you will see from now on in this text. Asset section is on the LEFT, Liabilities and Owner’s Equity sections are on the RIGHT. This is the form you saw in chapters 2-5. FORMS OF BALANCE SHEETS REPORT FORM ACCOUNT FORM

  27. CLASSIFIED BALANCE SHEET • Similar items are grouped together • Assets are classified as: • Current Assets • Property, Plant, and Equipment • Liabilities are classified as: • Current Liabilities • Long Term Liabilities

  28. CURRENT ASSETS • Assets (including cash) that will be converted into cash or consumed within one year or the normal operating cycle, whichever is longer • Examples: • Cash, Accounts Receivable, Supplies, Prepaid Insurance

  29. OPERATING CYCLE The time period required to purchase supplies and services and convert them back into cash Provide Services for Cash and “On Account” Collect Receivables Purchase Supplies and Services Back to Cash Start with cash

  30. PROPERTY, PLANT, AND EQUIPMENT • Assets that are expected to serve the business for many years • Also called Plant Assets or Long-Term Assets • Examples: • Land, Buildings, and Equipment

  31. CURRENT LIABILITIES • Liabilities that are due within one year or the normal operating cycle of the business, whichever is longer • They will be paid out of current assets. • Examples: • Accounts Payable • Wages Payable

  32. LONG-TERM LIABILITIES • Obligations that are not expected to be paid within a year and do not require the use of current assets • Also called Long-Term Debt • Example: • Mortgage on an office building • Jessica Jane does not have any long-term liabilities.

  33. Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20-- Assets Current Assets Current Assets are listed first.

  34. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 3600 Del. Eq. 3600 100 A. D.-Del. Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay. 2000 2000 J J, Cap. 150 J J, Drawing 150 Current Assets Del. Fees 2150 2150 700 Wages Exp. 700 200 Rent Exp. 200 Sup. Exp 60 60 50 Tel. Exp. 50 Ins. Exp. 25 25 Depr. Exp. 100 100 1135 2150 4965 3950 6100 6100 1015 Net Income 1015 2150 4965 2150 4965

  35. Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20-- Assets Current Assets Cash $370 Accounts Receivable 650 20 Supplies Prepaid Insurance 175 Total Current Assets $1,215 Property, Plant, and Equipment The long-term assets are listed next.

  36. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 3600 Del. Eq 3600 100 A. D.-Del Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay 2000 2000 J J, Cap Property, Plant, and Equipment includes the long-term assets AND their related Accumulated Depreciation accounts. 150 J J, Drawing 150 Del. Fees 2150 2150 700 Wages Exp 700 200 Rent Exp 200 Sup. Exp 60 60 50 Tel. Exp. 50 Ins. Exp. 25 25 Depr. Exp. 100 100 1135 2150 4965 3950 6100 6100 1015 Net Income 1015 2150 4965 2150 4965

  37. Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20-- Assets Current Assets Cash $370 Accounts Receivable 650 20 Supplies Prepaid Insurance 175 Total Current Assets $1,215 Property, Plant, and Equipment Delivery Equipment $3,600 Accumulated Depr. - Delivery Eq. 100 3,500 Book Value

  38. Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20-- Assets Current Assets Cash $370 Accounts Receivable 650 20 Supplies Now for the Liabilities!!! Prepaid Insurance 175 Total Current Assets $1,215 Property, Plant, and Equipment Delivery Equipment $3,600 Accumulated Depr. - Delivery Eq. 100 3,500 Total Assets $4,715 Liabilities

  39. Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20-- Assets Current Assets Cash $370 Just as with assets, the current (or short-term) are shown first. Accounts Receivable 650 20 Supplies Prepaid Insurance 175 Total Current Assets $1,215 Property, Plant and Equipment Delivery Equipment $3,600 Accumulated Depr. - Delivery Eq. 100 3,500 Total Assets $4,715 Liabilities Current Liabilities

  40. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 3600 Del. Eq. 3600 100 A. D.-Del. Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay. 2000 2000 J J, Cap. J J, Drawing 150 150 Del. Fees 2150 2150 Jessica has only two liabilities and they are both current…. Accounts Payable and Wages Payable 700 Wages Exp 700 200 Rent Exp 200 Sup. Exp 60 60 50 Tel. Exp 50 Ins. Exp 25 25 Depr. Exp 100 100 1135 2150 4965 3950 6100 6100 1015 Net Income 1015 2150 4965 2150 4965

  41. Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20-- Assets Current Assets Cash $370 Accounts Receivable 650 20 Supplies Prepaid Insurance 175 Let’s shift to the lower part of our Balance Sheet. Total Current Assets $1,215 Property, Plant and Equipment Delivery Equipment $3,600 Accumulated Depr. - Delivery Eq. 100 3,500 Total Assets $4,715 Liabilities Current Liabilities Accounts Payable $1,800

  42. Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20-- Liabilities Current Liabilities Accounts Payable $1,800 Wages Payable 50 Total Current Liabilities $1,850 Owner’s Equity Since Jessica does not have long-term liabilities, we will move on to the Owner’s Equity section.

  43. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 3600 Del. Eq. 3600 100 A. D.-Del. Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay. 2000 2000 J J, Cap. 150 J J, Drawing 150 Del. Fees 2150 2150 700 Wages Exp. 700 Caution!!! This capital amount does not include Net Income or Drawing. We must use the June 30th capital amount from the Statement of Owner’s Equity. 200 Rent Exp. 200 Sup. Exp. 60 60 50 Tel. Exp. 50 Ins. Exp. 25 25 Depr. Exp. 100 100 1135 2150 4965 3950 6100 6100 Net Income 1015 1015 2150 4965 2150 4965

  44. Jessica Jane’s Campus DeliveryStatement of Owner’s EquityFor Month Ended June 30, 20-- Jessica Jane, capital, June 1, 20-- $2,000 Net Income for June $1,015 150 Less: Withdrawals for June Increase in Capital 865 Jessica Jane, capital, June 30, 20-- $2,865 This is the amount we will put on the Balance Sheet.

  45. Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20-- Liabilities Current Liabilities Accounts Payable $1,800 Wages Payable 50 Total Current Liabilities $1,850 Owner’s Equity Jessica Jane, Capital 2,865 Total Liabilities and Owner’s Equity $4,715 It Balances!!! Total Assets of $4,715 equals Total Liabilities and Owner’s Equity of $4,715.

  46. CLOSING PROCESS • Gives temporary accounts zero balances so they are prepared to accumulate new information for the next accounting period • Involves four closing journal entries • Income Summary account is used to aid in the closing process.

  47. PERMANENT ACCOUNTS • All accounts reported on the Balance Sheet • Assets (including contra-assets) • Liabilities • Capital account • Contain the results of all transactions since the business started • NOT CLOSED

  48. TEMPORARY ACCOUNTS • Accumulate information for a specific accounting period • All accounts not on the Balance Sheet • Revenues • Expenses • Drawing • These accounts are closed.

  49. CLOSING ENTRY ENTRY #1 Close Revenue Accounts to Income Summary

  50. ACCOUNT TITLE ADJ. T. B. INCOME STMT BALANCE SHEET DR. CR. DR. CR. DR. CR. 370 Cash 370 Accts. Rec. 650 650 Supplies 20 20 Ppd. Ins. 175 175 Revenue 3600 Del. Eq. 3600 100 A. D.-Del. Eq. 100 Accts. Pay. 1800 1800 50 50 Wages Pay. J J, Cap. 2000 2000 150 J J, Drawing 150 Del. Fees 2150 2150 700 Wages Exp. 700 200 Rent Exp. 200 Sup. Exp. 60 60 50 Tel. Exp. 50 Ins. Exp. 25 25 Depr. Exp. 100 100 1135 2150 4965 3950 6100 6100 1015 1015 2150 4965 2150 4965

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