Accounting for a Service Business Organized as a Proprietorship - Chapter 9 -

Financial Statements for a Proprietorship

Julie Junior used the general ledger account balances to transfer to the worksheet, which showed her that the business had a net income. (If you remember a net income means she is making more money than she is spending.)

This information from the worksheet is very useful for her this year to see the outlook of her business. She can use the information from the worksheet to compare how her business does from year to year, however, for the information to be useful for her in the future, she will need to use the same dates for the fiscal year and the same forms from year to year so that she will be comparing the exact information from year to year, thus making the comparison of value.

The outcome of the comparison can be used to analyze, summarize and report the businesses financial outlook in a meaningful way for Julie, or for owners and managers of a business to see if they are making good business decisions or to see if they need to make changes to some or all parts of the business to make more money or to run the business more effectively. From the worksheet, two financial statements can be created to make the needed comparisons. These statements are the

1-  Income Statement

2-  Balance Sheet

The Income Statement

The income statement reports the revenue and expenses for the SAME fiscal period. The best sources to obtain information needed to prepare an income statement are the worksheets income statement columns and the account titles.

The Income Statement has four sections

1-  Heading of an Income Statement

a-

b-

c-

2-  Revenue Section

a-

b-

If the Revenue section has more than one source of revenue put both account titles in the far left column, the amounts of the accounts in the left column, draw a single line under the last revenue resource, write Total Sales on the next line under the account titles and total the revenue resources. Then finally put the total of the revenue in the right column.

3-  Expenses Section

Remember to draw a single line under the last expense, put the total expense amount in the right column and draw a single line under the total expense amount

2-  Net Income Statement Section

a-  Calculate the net income

b-  The Net Income amount on the Income Statement needs to be compared with the net income shown on the work sheet, both amounts should be the same

c-

d-

*To record a net loss, (if total expenses exceed the total sales), Net Loss goes in the first column on the left. Subtract the total expenses from the revenue to calculate the net loss. Record the amount of net loss in the second column on the right in parentheses. (The parentheses shows that the number is negative)

Julie Junior
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement /
Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit
1 / Cash / 433.00 / 433.00
2 / Petty Cash / 0.00 / 0.00
3 / Supplies / 140.00 / 125.00 (a) / 15.00
4 / Prepaid Insurance / 150.00 / 137.50 (b) / 12.50
5 / Hairagami / 0.00 / 0.00
6 / Sally’s Beauty Supply / 0.00 / 0.00
7 / Julie Junior, Capital / 400.00 / 400.00
8 / Julie Junior, Drawing / 50.00 / 50.00
9 / Income Summary
10 / Sales / 425.00 / 425.00
11 / Advertising Exp. / 0.00 / 0.00
12 / Insurance Expense / 0.00 / 137.50 (b) / 137.50
13 / Miscellaneous Exp. / 0.00 / 0.00
14 / Rent Expense / 0.00 / 0.00
15 / Repair Expense / 0.00 / 0.00
16 / Supplies Expense / 0.00 / 125.00 (a) / 125.00
17 / Utilities Expense / 52.00 / 52.00
18 / 825.00 / 825.00 / 262.50 / 262.50 / 314.50 / 425.00 / 510.50 / 400.00
18 / Net Income / 110.50 / 110.50
18 / 425.00 / 425.00 / 510.50 / 510.50
% of sales

Once Julie has both the revenue total and the expenses total, she can compare the sales total to the net income/net loss and to the expenses total. This comparison is called a COMPONENT PERCENTAGE analysis.

It is important to compare the component percentage from one fiscal period to the previous fiscal period to see if the percentage is acceptable or not. Acceptable component percentage averages from various industry organizations which have similar businesses are published yearly. If previous percentages or other necessary information is not available, compare your component percentage with that of a similar company.

When figuring the component percentage for Revenue, it’s percent of sales is always 100.0.

To figure the Total Expense component percentage, use the following formula:

To figure the Net Income component percentage, use the following formula:

The Income Statement shows us that Julie spends 74% of her sales on the expenses necessary to operate her business, and she makes (profits) 26 percent of her sales as extra money. I’d say she’s doing ok.

Balance Sheet

The balance sheet reports the assets, liabilities, and owner’s equity for a specific date. The best sources to obtain information needed to prepare a balance sheet are the worksheet’s balance sheet columns and the account titles.

The Balance Sheet has four sections

1- Heading of an Income Statement

a-

b-

c-

2-  Asset Section

a-

b-

3-  Equities Section

The two equities reported are 1- liabilities and 2- owner’s equity.

a-

b-

c-

d-

e-

f-

To figure out the current capital, use the following equation

h-

i-

j-

k-

*If you have a net loss to report the current capital is calculated with the following formula:

Capital Account Balance - Net Loss - Drawing Account Balance = Current Capital

Julie Junior
Work Sheet
For Fiscal Period Ended December 31, 20 --
Account Title / Trial Balance / Adjustments / Income Statement /
Balance Sheet
Debit / Credit / Debit / Credit / Debit / Credit / Debit / Credit
1 / Cash / 433.00 / 433.00
2 / Petty Cash / 0.00 / 0.00
3 / Supplies / 140.00 / 125.00 (a) / 15.00
4 / Prepaid Insurance / 150.00 / 137.50 (b) / 12.50
5 / Hairagami / 0.00 / 0.00
6 / Sally’s Beauty Supply / 0.00 / 0.00
7 / Julie Junior, Capital / 400.00 / 400.00
8 / Julie Junior, Drawing / 50.00 / 50.00
9 / Income Summary
10 / Sales / 425.00 / 425.00
11 / Advertising Exp. / 0.00 / 0.00
12 / Insurance Expense / 0.00 / 137.50 (b) / 137.50
13 / Miscellaneous Exp. / 0.00 / 0.00
14 / Rent Expense / 0.00 / 0.00
15 / Repair Expense / 0.00 / 0.00
16 / Supplies Expense / 0.00 / 125.00 (a) / 125.00
17 / Utilities Expense / 52.00 / 52.00
18 / 825.00 / 825.00 / 262.50 / 262.50 / 314.50 / 425.00 / 510.50 / 400.00
19 / Net Income / 110.50 / 110.50
20 / 425.00 / 425.00 / 510.50 / 510.50

The balance sheet shows Julie that the business is in good standing. The assets are much greater than the liabilities, (what she owes). This is good! From theses two forms, Julie can report to her teacher that she is operating a very successful business.