Preparing Financial Documents

The Income Statement&

Balance Sheet

The Income Statement

A financial statement that indicates how much money a business earns or loses during a period of time.

This document indicates how much profit or loss a business expects and is sometimes called a Profit and Loss Statement.

A new business should prepare an Income Statement monthly as a way to monitor whether making a profit or not.

Income Statement

Parts of the Income StatementREVENUE FROM SALES

-Cost of Goods Sold

=GROSS PROFIT ON SALES-Operating Expenses

=NET INCOME FROM OPERATIONS-Interest Expense from loans

=NET INCOME BEFORE TAXES-Taxes owed

=NET INCOME AFTER TAXES

Income Statement

Gross Sales (Amount of all sales for the period based on receipts)

-Returns and Allowances (Merchandise returned or adjustment in charges to customers)

=Revenue from Sales (Sales before cost of goods adjustment)

Calculating Revenue from Sales

Income Statement

=Net Sales

Beginning Inventory (Ending Inventory from last month)

-Purchases (New inventory purchased)

Total Goods Available for Sale-Ending Inventory (Inventory left unsold)

=Total Cost of Goods Sold

Net Sales - Total Cost of Goods Sold=GROSS PROFIT ON SALES

Calculating Gross Profit on Sales

Income Statement

GROSS PROFIT ON SALES

-Total Operating Expenses (including both startup costs, continuing costs, loan payments, etc.)

=NET INCOME FROM OPERATIONS

Calculating Net Income from Operations

Income Statement

NET INCOME FROM OPERATIONS

- Interest expense

= Net Income Before Taxes

- Federal Income Taxes

= Net Income After Taxes

Calculating Net Income Before and After Taxes

Sample Income Statement

For a sample of an Income Statement, click on the Income Statement Sample file in this lesson.

Use this as a guide when creating your Income Statement.

Balance Sheet

A financial document that shows Assets Liabilities Capital (net worth)

The balance sheet is based on the following equation:

Assets = Liabilities + Owner’s Equity

Balance Sheet

Assets (What a business owns) Current Assets

Cash Accounts receivable (owed by others) Notes receivable Inventory

Fixed Assets Equipment Furniture Vehicles

Balance Sheet

Liabilities (What a business owes) Current Liabilities

Accounts payable (to other companies) Notes payable (to banks, etc.) Salaries Income taxes payable

Long-term Liabilities Mortgage/Loans payable Notes payable

Balance Sheet

Equation for the Balance Sheet

Assets = Liabilities + Owner’s Equity

If you have calculated your balance sheet correctly, the above formula will be true.

Balance Sheet

For a sample of an Income Statement, click on the Income Statement Sample file in this lesson.

Use this as a guide when creating your Income Statement.