Financial statement balance sheet – Part 1

THERE are two main questions owners of a business often ask: a. What is my net income? b. What is my net equity?

It is important to note that the accounting equation which provides the simple balance of assets, liabilities and capital/owner’s equity does not sufficiently give a complete answer to those questions. For these questions to be adequately answered, we need to know the:

1. Type and amount of income and also the type and amount of each expense for the specific accounting period.

2. Type and amount of each asset, liability and owner’s equity at the end of the specific accounting period. The above information is provided by the: a. Income statement b. Balance sheet Facts to be retained: 1. The income statement and the balance sheet are known as accounting statements.

2. Net income for a specific period is shown in a statement known as the income statement.

3. Net loss for the specific period is shown in the income statement.

4. Income and expenses are two groups of items on the income statement. 5. Net income is the difference between income and expense. 6. Money withdrawn by the owner for personal use is known as drawings; it is not an expense, but it reduces capital.

7. The balance sheet is a financial statement that lists the assets, liabilities and capital at the end of the accounting period.

WORKED EXAMPLE 1

You are required to prepare an income statement based on the information below: WORKED EXAMPLE 2 The information below was taken from the income statement of Karl Williams: You are required to: Find the increase or decrease in capital.

SOLUTION

WORKED EXAMPLE 2: WORKED EXAMPLE 3 You are required to: Use the following information to determine the Capital on December 31, 2016.

SOLUTION

WORKED EXAMPLE 3:

BALANCE SHEET –PART 1

The balance sheet has many definitions, including those listed below:

i. A ‘statement of financial position’; it reveals the company’s assets, liabilities and owner’s equity (net worth).

ii. An accounting tool used by individuals, business owners and large corporations to track net worth.

iii. A snapshot of the company’s financial position at a single point in time.

It is known as a balance sheet because the two sides balance. Since a company pays for all the assets, it has either by: a. Borrowing money – thus creating liabilities b. Getting money from shareholders/owners – known as equity/capital

COMPONENTS OF THE BALANCE SHEET

There are three segments of the balance sheet which are: i. assets ii. liabilities iii. capital/equity accounts in which to document the value of each.

This is where we will end for this week. Join me next week as we continue to complete the syllabus. Grasp the concepts and retain them. You will need them as you progress to excellence. See you next week.