lecture 4 income statement: cash versus accrual accounting
TRANSCRIPT
Lecture 4
Income Statement:Cash versus Accrual
Accounting
Firm of the Day
2
Goals of Today’s Class
• Better understanding of Revenues and Expenses
• Better understanding of the Income Statement
• Better understanding of cash versus accrual accounting
4
+ -
Asset
(Debit) (Credit)
Liability or Owners’ Equity
(Debit) (Credit)
+-
Retained Earnings
Expenses/Losses
(Debit)
Revenues/Gains
(Credit)
++
Review: Debits and Credits
Memorize this for Assets Flip it for Liabs + OE
An increase in an Expense is a decrease in Retained Earnings. (We decrease Owners’ Equity accounts with a debit.)
An increase in a Revenue is an increase in Retained Earnings. (We increase Owners’ Equity accounts with a credit.)
Remember RE is an Owners’ Equity Account
Review of Shareholders’ Equity
• What is “contributed capital”?– The initial investment of owners– e.g., common stock
• What is “retained earnings”?– The cumulative net income of the
company that has not been distributed as dividends.
Peeking Ahead -- Contributed Capital: Common Stock
Accounting for initial public issuance of common stock
• Very simple if stock has no par value
1. Debit Cash for the amount of the contribution
2. Credit Common Stock for the amount of the contribution
Example: Sell 2,000 shares of “no par common” for $8 per share
(Debit) Cash $16,000(Credit) Common Stock $16,000
Accounting for initial public issuance of common stock
• More complicated if stock has a stated par value
1. Debit Cash for the amount of the contribution
2. Credit Common Stock for par value only
Example: Sell 2,000 shares of “$1 par common” for $8 per share
(Debit) Cash $16,000(Credit) Common Stock (2,000 shs. @ $1 par) $2,000
3. Credit Other Paid in Capital for the difference (contribution – par value)
(Credit) Other Paid in Capital $14,000
Peeking Ahead -- Contributed Capital: Common Stock
Balance Sheet Equation
At = Lt + SEt
At = Lt + CSt + APICt +
REt
At-1 = Lt-1 + CSt-1 + APICt-1 +
REt-1
(At - At-1) = (Lt - Lt-1 ) + (CSt - CSt-1 ) + ( APICt - APICt-1 ) + ( REt - REt-1 )
∆A = ∆L + ∆CS + ∆APIC + ∆RE ∆A = ∆L + ∆CS + ∆APIC + Net Income -
Dividends ∆A = ∆L + ∆CS + ∆APIC + Revenue - Expenses -
Dividends
Income Statement
• Reports Net Income earned by the business over a period of time as a result of its profit-directed activities.
• Changes in shareholders’ equity due to profit-directed activities during an accounting period.
• Income statement accounts are temporary accounts.
• Net Income = Revenues – Expenses
Accrual Accounting
Goal is to account for all transactions that economically occurred in the pd.To document fundamental economics, we employ the accrual methodThe accrual method is best contrasted with the cash method of accounting through an example:
On December 29th, Best Buy sells and delivers an HDTV worth $2,000Customer purchases the TV using 6 month financing
Best Buy prepares its income statement and balance sheet on December 31st (this assumes a December fiscal year end)Did the sale officially occur in the period even though no cash was received?
Cash basis: No. Accrual Basis: Yes.
Accrual Accounting (continued)To properly account for periodic income, recognize revenues when earned and expenses when incurred, even though no cash has been exchangedThis concept is sometimes called the “matching principle”, where revenues are matched with expenses in the period in which they are incurred
e.g., salaries are often not paid to employees until a week or two after employees have provided their servicesAt the end of a period, firms must recognize earned, yet still unpaid, salary expense to correctly match the expense to the period in which the services were actually used
To allow for proper accounting of revenues and expenses, we employ two temporary holding accounts called Receivables and Payables
When revenues are earned, but no cash is received, we record an increase to a Receivable to reflect cash that we are owed in the futureWhen expenses are incurred, but no cash is paid, we record an increase to a Payable to reflect cash that we owe in the future
When and how do we identify and measure revenues and expenses?
Timing1. Cash Basis
REVENUES with the increase in cash resulting from the sale of goods or services, and EXPENSES with the decrease in cash associated with sales activities.Period 1 Period 2 Period 3 Period 4
Purchase inventory for resale, on credit, Cost = $10
Pay supplier $10
Sell and deliver inventoryon credit, Price = $20
Collect $20 from customer
Calculating Net Income using Cash Basis Accounting
Period 1 Period 2 Period 3 Period 4
Purchase inventory for resale, on credit, Cost = $10
Pay supplier $10 Sell and deliver inventory on credit, Price = $20
Collect $20 from customer
Net Income = Revenues - Expenses
= Assets in - Assets out
Period 1 = -
Period 2 = -
Period 3 = -
Period 4 = -
0
-10
0
+20
0
0
0
0
0
10
20
0
What is the downside to Cash Basis Accounting?
• Reflects the cost and benefit of operating transactions only when cash payments and cash receipts occur:
- Delay in recognizing revenues until cash is received, despite the fact that the store has performed its primary mission: sale of inventory.
- Poor matching of the true costs of generating revenues to the periods in which they are generated.
2. Accrual Basis - Revenues
• Revenues and expenses are not necessarily associated with the cash inflows and cash outflows.
• Identification: Revenue is the increase in assets (not
necessarily cash) and/or decrease in liabilities resulting from the principal
income generating activities of the business -- selling goods or services in the ordinary course of business.
• Timing (Recognition): Revenues: Benefits earned by an entity when the
following criteria are satisfied:
1. The entity has delivered its goods/services to the customer.
2. There is persuasive evidence of an arrangement for customer payment.
3. The price is fixed or determinable. 4. Collection of cash (or other benefits) is reasonably
assured, though there may still be some uncertainty (uncollectible accounts, warranties). The degree of uncollectability should be estimated with reasonable reliability.
• Revenue is recorded according to the revenue principles, regardless of when cash is received!
2. Accrual Basis - Expenses
• Revenues and expenses are not necessarily associated with the cash inflows and cash outflows.
• IdentificationExpense is a decrease in assets (not
necessarily cash) and/or an increase in liabilities, in a period, for the purpose of generating revenue in the period
• Timing (matching)Expenses are recognized– When the associated revenue is recognized– Matched to the timing of revenue– Reported in the income statement in the same
period as the revenue they gave rise to.
• “Matching principle”: recognize costs and/or assets used as expenses in the period in which they produce revenue
• Goal of accrual accounting: report inflows of assets when they are earned, and net them against outflows of assets used to generate them
Calculating Net Income using Accrual Basis Accounting
Period 1 Period 2 Period 3 Period 4
Purchase inventory for resale, on credit, Cost = $10
Pay supplier $10 Sell and deliver inventory on credit, Price = $20
Collect $20 from customer
Net Income = Revenues - Expenses
= Assets in - Assets out
Period 1 = -
Period 2 = -
Period 3 = -
Period 4 = -
0
0
10
0
0
0
20
0
0
0
0
10
Cash vs. Accrual basis of accounting: Summary
• Cash basis of accounting: Method of accounting where income is calculated by recording revenues when cash is received and expenses when expenditures occur
• Accrual basis of accounting: Method of accounting where income is calculated by recording revenues when benefits are earned and expenses when resources are given up to produce the revenues (expenses are matched to revenues)
Please note that…
• The aggregate net income over the life of the business is the same for accrual and cash basis accounting, and is equal to cash inflows minus cash outflows. The only difference is one of timing.
• Cash basis – recognition of revenues and expenses are associated with the cash flows of the period.
• Accrual basis – timing of cash flows is not necessarily associated with the recognition of revenues and expenses.– Cash may be received/paid before, during, or after
revenue and expense recognition.
ABC Corp pays $12,000 to prepay 1 year’s rent
(Debit) Prepaid Rent $12,000
(Credit) Cash $12,000
Active vs. Passive Journal EntriesGenerally, two types of journal entries
Active: generated by an actual transaction on the transaction date
Passive: generated by an end-of-period required adjustment to update an account for a change due to passage of time
1 month elapses. ABC Corp must adjust the Prepaid Rent account to reflect time passage.
(Debit) Rent Expense $1,000
(Credit) Prepaid Rent $1,000
Notice the difference:Active transactions are those made by the firm in the conduct of business
Passive transactions are those made to update the status or balance of accounts that typically were created previously by active transactions
ABC Corp pays $12,000 to prepay 1 year’s rent
(Debit) Prepaid Rent $12,000
(Credit) Cash $12,000
Active vs. Passive Journal Entries (continued)
If we did not make passive or adjusting entries, our accounts would stay stuck on the original entry and would therefore be inaccurate
Prepaid Rent
12,000
Without an adjustment as time passes, this amount would stay here (and on the balance sheet) forever
ABC Corp pays $12,000 to prepay 1 year’s rent
(Debit) Prepaid Rent $12,000
(Credit) Cash $12,000
Active vs. Passive Journal Entries (continued)
If we did not make passive or adjusting entries, our accounts would stay stuck on the original entry and would therefore be inaccurate
Prepaid Rent
12,000
1 month elapses. ABC Corp must adjust the Prepaid Rent account to reflect time passage.
(Debit) Rent Expense $1,000
(Credit) Prepaid Rent $1,000
1,000
11,000
So at regular time intervals, we make necessary passive adjustments
Active vs. Passive Journal Entries (continued)
Typical passive entries include adjustments for:
Interest owed but not yet paid
Rent owed but not yet paid
Salaries earned but not yet paid
Interest earned but not yet received
Rent earned but not yet received
Systematic depreciation of assets through timeSystematic use or expiration of assets through time (like prepaid rent or drilling rights)
Basic Accounting Flow Example
Self-Smart Corp receives $100,000 cash from owners to start the business (Debit) Cash $100,000
(Credit) Contributed Capital $100,000
Balance Sheet Accounts
Income Statement Accounts
100,000 100,000
Cash Contrib Cap
Self-Smart Corp buys one inventory item for $20,000 cash
Inventory
20,000
20,000(Debit) Inventory $20,000
(Credit) Cash $20,000
Self-Smart Corp sells the inventory item for $40,000 cash(Debit) Cash $40,000
(Credit) Sales Revenue $40,000
40,000
40,000
Sales Revenue(Debit) Cost of Goods Sold (Expense) $20,000(Credit) Inventory $20,000
Cost of Goods Sold
20,000
20,000
End of Period—Prepare Financial Statements
Basic Accounting Flow Example
Balance Sheet Accounts
Income Statement Accounts
100,000 100,000
Cash Contrib Cap
Inventory
20,000
20,000
40,000
40,000
Sales RevenueCost of Goods Sold
20,000
20,000
Income Statement
Revenues
Expenses
Net Income
-=
40,000
20,000
20,000
Retained Earns
20,000 40,000
Basic Accounting Flow Example
Balance Sheet Accounts
Income Statement Accounts
100,000 100,000
Cash Contrib Cap
Inventory
20,000
20,000
40,000
40,000
Sales RevenueCost of Goods Sold
20,000
20,000
Balance Sheet
120,000
020,000
AssetsCash 120,000
Liabilities0
Owners’ EquityContrib Cap 100,000Ret Earns 20,000
Inv 0 100,000
20,000
0 0
40,000
An Extended Example
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
(Debit) Cash $100,000(Credit) Common Stock $100,000
100,000
100,000
Jan 1: Received $100,000 in exchange for 10,000 shares of common stock
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
No journal entry since there was no actual transaction (no services performed by new employee yet)
100,000
100,000
Jan 1: Hired warehouse/marketing supervisor at salary of $2,000 per month (paid on 7th of each month after actual work month has elapsed)
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
(Debit) Prepaid Rent $4,500(Credit) Cash $4,500
100,000
100,000
Prepaid Rent
4,5004,500
Jan 1: Prepaid $4,500 to landlord for 3 months rent on warehouse
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
(Debit) Inventory $55,000(Credit) Accounts Payable $55,000
100,000
100,000
Prepaid Rent
4,5004,500
Inventory
Accts Paybl
55,000
55,000
Jan 10: Purchased $55,000 (10,000 units) of inventory on credit. 1% discount if paid within 10 days
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
(Debit) Accounts Payable $55,000(Credit) Cash $54,450(Credit) Gain on Discount $550
100,000
100,000
Prepaid Rent
4,5004,500
Inventory
Accts Paybl
55,000
55,00055,000
54,450
Discount
550
Jan 19: Paid $54,450 to inventory vendor
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
(Debit) Accounts Receivable $26,000(Credit) Sales Revenue $26,000
100,000
100,000
Prepaid Rent
4,5004,500
Inventory
Accts Paybl
55,000
55,00055,000
54,450
Discount
550
(Debit) Cost of Goods Sold $11,000 (Credit) Inventory $11,000
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
11,000
Jan 22: Sold 2,000 units of inventory on credit for $26,000. Collect 2% penalty if not paid in 15 days
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
100,000
Prepaid Rent
4,5004,500
Inventory
Accts Paybl
55,000
55,00055,000
54,450
Discount
550
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
11,000
Jan 30: We are done with active January entries. Now we need to passively adjust some accounts before we prepare the January balance sheet and income statement.
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
100,000
Prepaid Rent
4,5004,500
Inventory
Accts Paybl
55,000
55,00055,000
54,450
Discount
550
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
11,000
Jan 30: Passive adjustment to reflect prepaid rent that has been used up
(Debit) Rent Expense $1,500 (Credit) Prepaid Rent $1,500
1,500
Rent Exp
1,500
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
100,000
Prepaid Rent
4,5004,500
Inventory
Accts Paybl
55,000
55,00055,000
54,450
Discount
550
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
11,000
Jan 30: Passive adjustment to reflect the liability you now owe your employee for the work performed
1,500
Rent Exp
1,500
(Debit) Salary Expense $2,000 (Credit) Salary Payable $2,000
Sal Exp
Sal Paybl
2,000
2,000
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
100,000
Prepaid Rent
4,5004,500
Inventory
Accts Paybl
55,000
55,00055,000
54,450
Discount
550
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
11,000
Jan 30: Now we can prepare the financial statements
1,500
Rent Exp
1,500
Sal Exp
Sal Paybl
2,000
2,000
41,050
3,000
44,000
0
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
550
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
Jan 30: Now we can prepare the financial statements
Rent Exp
1,500
Sal Exp
Sal Paybl
2,000
2,000
41,050 3,000
44,000
0
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
550
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
Jan 30: Now we can prepare the financial statements
Rent Exp
1,500
Sal Exp
Sal Paybl
2,000
2,000
41,050 3,000
44,000
0
Sales 26,000Gain from Discount 550+
26,550
Total Revenues and Gains
- Cost of Goods Sold 11,000- Rent Expense 1,500
- Salary Expense 2,000
=
= Net Income 12,050
Income Statement
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
550
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
Jan 30: Now we can prepare the financial statements
Rent Exp
1,500
Sal Exp
Sal Paybl
2,000
2,000
41,050 3,000
44,000
0
Ret Earns
After the income statement is prepared, we transfer Income Statement accounts into Retained Earnings to allow for balance sheet preparation
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
550
Accts Recvbl
COGS
Sales
26,000
26,000
11,000
Rent Exp
1,500
Sal Exp
Sal Paybl
2,000
2,000
41,050 3,000
44,000
0
Ret Earns
(Debit) Sales $26,000(Debit) Discount $550
(Credit) Retained Earnings 26,550
Jan 30: Close Revenue Accounts into Retained Earnings
26,000 550
26,550
0 0
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
11,000
Rent Exp
1,500
Sal Exp
Sal Paybl
2,000
2,000
41,050 3,000
44,000
0
Ret Earns
(Debit) Retained Earnings $14,500(Credit) Cost of Goods Sold $11,000(Credit) Salary Expense $ 2,000(Credit) Rent Expense $ 1,500
Jan 30: Close Expense Accounts into Retained Earnings
26,550
11,000 1,500
2,00014,500
0 0
0
12,050
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
Jan 30: Now the Balance Sheet is effectively already prepared
12,050
Total Liabs + Equity = $114,050Total Assets = $114,050
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
Jan 30: Now the Balance Sheet is effectively already prepared
12,050
Balance Sheet
Assets
Cash 41,050Prep Rent 3,000Inventory 44,000Accts Rec 26,000Total Assets 114,050
Liabilities + Owners’ Equity
Accts Pay 0Salaries Pay 2,000Common Stock 100,000Retained Earns 12,050Total Liabs + OE 114,050
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
February: Now we continue to build off of these accounts as the business continues
February: Notice the Income Statement accounts are all “clean” to enable a new cumulation period
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
February 3: Sold 3,000 units of inventory for $39,000 cash
(Debit) Cash $39,000(Credit) Sales Revenue $39,000
(Debit) Cost of Goods Sold $16,500 (Credit) Inventory $16,500
39,000 39,000
16,500
16,500
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
February 7: Paid $2,000 cash for radio advertisements
(Debit) Advertising Expense $2,000(Credit) Cash $2,000
39,000 39,000
16,500
16,500
Adv Exp
2,000
2,000
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
February 7: Paid $2,000 salary to employee
(Debit) Salary Payable $2,000(Credit) Cash $2,000
39,000 39,000
16,500
16,500
Adv Exp
2,000
2,000 2,000
2,000
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
February 13: Received payment of $26,520 from Jan 22nd customer
(Debit) Cash $26,520(Credit) Accounts Receivable $26,000(Credit) Collected Fee Revenue $520
39,000 39,000
16,500
16,500
Adv Exp
2,000
2,00026,520
26,000
Fee Rev
520
2,000
2,000
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
39,000 39,000
16,500
16,500
Adv Exp
2,000
2,00026,520
26,000
Fee Rev
520
2,000
2,000
Feb 29: We are done with active February entries. Now we need to passively adjust some accounts before we prepare the February balance sheet and income statement.
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
39,000 39,000
16,500
16,500
Adv Exp
2,000
2,00026,520
26,000
Fee Rev
520
2,000
2,000
Feb 29: Passive adjustment to reflect prepaid rent that has been used up
(Debit) Rent Expense $1,500 (Credit) Prepaid Rent $1,500
1,500
1,500
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
39,000 39,000
16,500
16,500
Adv Exp
2,000
2,00026,520
26,000
Fee Rev
520
2,000
2,000
1,500
1,500
Feb 29: Passive adjustment to reflect the liability you now owe your employee for the work performed
(Debit) Salary Expense $2,000 (Credit) Salary Payable $2,000
2,000
2,000
Feb 29: Now we can prepare the financial statements
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
26,000
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
41,050 3,000
44,000
0
Ret Earns
12,050
39,000 39,000
16,500
16,500
Adv Exp
2,000
2,00026,520
26,000
Fee Rev
520
2,000
2,000
1,500
1,500
2,000
2,000
102,570
1,500
27,500 0
2,0002,000
Feb 29: I’ll leave it up to you to:
Balance Sheet Income Statement
Assets Liabilities
Equity
Revenues/Gains
Expenses/Losses
Cash
Common
100,000
Prepaid Rent
Inventory
Accts Paybl Discount
0
Accts Recvbl
COGS
Sales
0
0
0
Rent Exp
0
Sal Exp
Sal Paybl
2,000
0
102,570 1,500
27,500
0
Ret Earns
12,050
39,000
16,500
Adv Exp
2,000
Fee Rev
520
1,500
2,000
2,000
(1) Prepare the Income Statement(2) Close the Revenue and Expense accounts to Ret Earns
(3) Prepare the Balance Sheet