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In bookkeeping, there are two essential flowcharts which must be properly understood namely the “ACCOUNTING CYCLE” AND THE INTER-RELATIONSHIP AMONGST the financial statements like the Income Statement, Balance Sheet, Statement of Owner’s and Cash flow statements.
As mentioned, the acccounting cycle enable us to have a snapshot of whats should be done from source documents to preparation of financial statements whilst the below demonstrates the double entry effect which has inter-relationship between the various financial statements:
As discussed earlier on the two formats of Income statement, similarly we have two formats normally prepared by bookeepers for their companies.
Before preparing the format we need to understand that a Balance Sheet is called the Statement of Financial Position. as it is a snapshot of a company’s financial position at a particular point in time. The Accounting equation which is Assets=Liabilities+Stockholder’s Equity is closely link to the Balance Sheet. Because of this accounting equation and the double entry system, the Balance sheet must always tally.
Below we have two formats namely the Horizontal and Vertical Presentation to display the Balance sheet of a company:-
(a)Format of A Balance Sheet: Horizontal Presentation
The horizontal presentation uses a format that present assets on the left and liabilities and equity on the right
XYZ Company
Balance Sheet As at December 31st 2008
|
Assets |
|
Liabilities & Stockholders’ Equity |
|
|
$ |
|
$ |
|
| Current Assets |
|
Current Liabilities | |
| Cash |
10,000 |
Accounts payable |
15,000 |
| Accounts Receivable |
20,000 |
Salaries Payable |
9,000 |
| Inventories |
30,000 |
Total Current Liabilities |
24,000 |
| Deposits, prepayments |
5,000 |
Bonds payable |
20,000 |
| Total Current Assets |
65,000 |
Mortgages |
35,000 |
|
|
Total Liabilities |
79,000 |
|
|
|
Stockholders’ equity |
|
|
| Property, plant and equipment, net |
55,000 |
Common stock |
50,000 |
| Intangible assets |
10,000 |
Retained earnings |
1,000 |
| Total Assets |
130,000 |
Total Liabilities and Stockholders’ equity |
130,000 |
(b) The Vertical Presentation of The Format Of A Balance Sheet
The vertical presentation show the assets followed by liabilities and equity directly below the assets.
XYZ Company
Balance Sheet As At 31 st December 2008
| Assets |
|
| Current Assets |
|
| Cash |
10,000 |
| Accounts Receivable |
20,000 |
| Inventories |
30,000 |
| Deposits, prepayments |
5,000 |
| Total Current Assets |
65,000 |
|
|
|
| Non Current Assets |
|
| Property, plant and equipment, net |
55,000 |
| Intangible assets |
10,000 |
| Total Non Current Assets |
65,000 |
| Total Assets |
130,000 |
| Liabilities & Stockholders’ Equity | |
|
|
$ |
| Current Liabilities |
|
| Accounts payable |
15,000 |
| Salaries Payable |
9,000 |
| Total Current Liabilities |
24,000 |
|
|
|
| Non Current Liabilities |
|
| Long Term Bonds payable |
20,000 |
| Mortgages |
35,000 |
| Total Non Current Liabilities |
55,000 |
| Total Liabilities |
79,000 |
| Stockholders’ equity |
|
| Common stock |
50,000 |
| Retained earnings |
1,000 |
| Total Liabilities and Stockholders’ equity |
130,000 |
For bookkeeper, it is important to understand that there are a few ways of preparing the format of an Income statement. Basically, there are two formats namely the Single Step Format and Multiple-Step Income Statement.
Below are the format for both the Single step and Multiple-Step Format of Income Statement. Also mentioned are their advantages and disadvantages.
Format of A Single Step Income Statement
|
|
$ |
| Revenues |
|
| Net Sales |
180,000 |
| Gains |
10,000 |
| Total revenues |
190,000 |
| Expenses |
|
|
Cost of goods sold |
55,000 |
| Selling and administrative expenses |
24,000 |
| Interest expenses |
10,000 |
| Losses |
8,000 |
| Income tax expenses |
15,000 |
| Total expenses |
112,000 |
|
Net Income |
78,000 |
Format of A Multiple Step Income Statement
|
|
$ |
| Net Sales |
180,000 |
| Cost of goods sold |
55,000 |
| Gross Profit |
125,000 |
| Selling and administrative expenses |
24,000 |
| Operating Profit |
101,000 |
| Other revenues and gains |
10,000 |
| Other expense and losses |
18,000 |
| Pretax income from continuing operations |
93,000 |
| Income tax expenses |
15,000 |
| Net Income |
78,000 |
Whether you use the Single Format Income Statement or Multiple Step Income Statement, you will still get the end result/bottom line re: same net income.
The advantages of using the multiple step income statement format are:
- It clearly display important financial and managerial information
- The four measures of profitability are revealed at four critical areas of a company’s operation namely gross profit, operating profit/operating income, pretax income and after tax net income
As for the single step format of Income Statement, the advantage is that is relatively simple to prepared and understand however, the gross and operating income figures are not stated which need to be computed.
Snapshot of how to prepare the Income statement,Owner’s equity statement and Balance sheet statement
Append below, a simple snapshot of preparing the following financial statements:
(a) How to prepare the Income Statement:
- All temporary or nominal accounts relating to incomes and expenses are closed by using closing entries and transferred to the Income Statement/Summary
Journalize the closing entries as follows:
For all Revenue accounts:
- Debit Revenue Account Credit Income Summary
For all Expenses accounts:
- Debit Income Summary Credit Expense Account
(b) How to prepare Owner’s Equity Statement:
- From (a) the Income statement is transferred to the Owner’s Equity Statement
For Profit in the Income Summary:
- Debit Income Summary Credit Owner’s Capital
For Loss in the Income Summary:
- Debit Owner’s Capital Credit Income Summary
- The Owner’s drawing account which is part of temporary/nominal account is similarly closed by using closing entry and transferred to the Owner’s Equity Statement
Accounting entries:
- Debit Owner’s Capital Credit Drawings Account
(c) How to prepare the Balance Sheet:
- All permanent or real accounts like all asset accounts, all liability accounts and owner’s capital account are not closed and transfer to the Balance Sheet(refer to vertical and horizontal format)
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