Provide an example of how the financial statements are articulated.
See attached file.
The procedure of preparation of financial statements is explained in a separate word document which is attached herewith. A sample statement showing 10 column worksheet along with income statement, Retained earning and Balance sheet is attached in excel format.
After transactions are identified, recorded, and summarized, and trial balance prepared, the following four financial statements are prepared.
1 INCOME STATEMENT
2 STATEMENT OF OWNER'S EQUITY
3 BALANCE SHEET
4 CASH FLOW STATEMENT
1. Generally we prepare four financial statements mentioned above as a composite financial statement set from the given Trial balance and additional information regarding various adjustments such as accrued revenue, Expenses payable, Unearned income, Amortization, Prepaid expenses etc.
2. It is more convenient to prepare Income statement and balance sheet with the help of a 10 column work sheet. A specimen 10 column work sheet is provided in the excel file attached herewith just for your information. The steps are summarized as under.
3. Assets should be entered in Dr column of Balance sheet section of work sheet as they are debit balances.
2. Accumulated amortization is the outcome of accumulated amortization at 1st January plus current year's depreciation as under.
Accumulated amortization 1st January (say) $4000
Add: Current year (2008) Depreciation $1000
Total accumulated amortization $5000
It is a contra asset which should be shown as deduction from cost of the asset i.e.
4. All liabilities should be entered in the credit column of Balance sheet section of work sheet and then carried to the Balance sheet with classification as current liabilities and long term liabilities. Please note that liabilities payable in one year period like account payable and note payable are current liabilities. Mortgage is a long term liability.
5. Service revenue is the item of revenues having credit balance as such entered in credit column of income statement of work sheet.
6. Expenses accounts are debit balances which are entered in debit column of income statement part of work sheet.
7. Dividend paid is a debit balance which is entered in debit column of work sheet for agreement of balances and finally deducted from owner's equity in owner's equity section of balance sheet.
7, 8. Adjusting Entries: There are some timing issues also in the preparation of financial statements. The economic life of the business is divided in to artificial periods in accordance with time period assumption.
Many transitions affect more than one time period. For example revenue is received in one period while it is actually earned in next or future period. Similarly expenses are paid in advance but the service might be received in next period.
9. Revenue recognition principal states that the revenue is recognized when income is actually earned.
10. Most of the business enterprises use accrual basis of accounting. In accrual accounting revenue is recognized when it is actually earned whether actually received or not.
11. Expenses are recoded when service is actually performed whether cash is paid or not. In other words revenues are recognized and expenses recorded when they are recognized or incurred in the related accounting period.
12. Therefore adjusting entries are made to adjust the accounts at the end of the period. The adjusting entries are incorporated in the work sheet by adding the expenses payable or incomes accrued in the related columns and showing assets and liabilities ...
The expert provides an example of how the financial statements are articulated.