How to Build Financial

StatementsIncome Statement (Profit and Loss) and

Balance Sheet (Position)

Balance SheetThis is constructed of Assets, Liabilities and Owners Capital (Issued Stock/Shares)

Assets (DR) = Liabilities (CR) + Owners Capital (CR)

All Assets have a DEBIT as the normal balance

All Liabilities and Owner’s capital have a CREDIT as the normal balance

This statement tells you how much an entity is worth

Balance Sheet Continued

• Start building the balance sheet by listing ALL the assets first (debit balances)

Current AssetsCashTemporay investmentsAccounts recievableInventorySuppliesPrepayments

Investments

Property Plant and EquipmentLandLand ImprovementsBuildingsEquipment Less Accumulated Depreciation

Intangible AssetsGoodwillOther Assets

Balance Sheet Continued

• Next list all the Liabilities and Owner’s Capital (credit balances) Current Liabilities

Notes payableAccounts payableWages payableInterest payableTaxes payableWarranty liabilityUnearned revenues

Long-Term LiabilitiesLong-term loansBonds payable

Stockholders' EquityCommon stockRetained earnings(less Treasury stock) - negative

Balance Sheet Concluded

• Remember that in the balance sheet

Assets (DR) = Liabilities (CR) + Owners Capital (CR)

So all the assets should equal the (liabilities + owners capital)

Layouts for Balance Sheets

• You can use either a columnar account or a T-account

• Once you understand the debit and credit aspect of the balance sheet (this includes how to increase or decrease these balances)…either systems are very easy

T-Account Balance Sheet

Debit Credit

Current Assets Current LiabilitiesCash Notes payableTemporay investments Accounts payableAccounts recievable Wages payableInventory Interest payableSupplies Taxes payablePrepayments Warranty liability

Unearned revenuesInvestments

Property Plant and Equipment Long-Term LiabilitiesLand Long-term loansLand Improvements Bonds payableBuildingsEquipment Stockholders' EquityLess Accumulated Depreciation Common stock

Retained earningsIntangible Assets (less Treasury stock) - negativeGoodwillOther Assets

Columnar Balance SheetCurrent Assets DebitCashTemporay investmentsAccounts recievableInventorySuppliesPrepayments

InvestmentsProperty Plant and EquipmentLandLand ImprovementsBuildingsEquipment Less Accumulated Depreciation

Intangible AssetsGoodwillOther Assets xxxxxxxxx

Current Liabilities CreditNotes payableAccounts payableWages payableInterest payableTaxes payableWarranty liabilityUnearned revenues

Long-Term LiabilitiesLong-term loansBonds payable

Stockholders' EquityCommon stockRetained earnings(less Treasury stock) - negative

xxxxxxxxx

Tricky Adjustments For the Balance Sheet• Accumulated depreciation of an asset (CREDIT

balance) reduces the book value of that asset

• Doubtful debts (CREDIT balance) are written off against the Accounts Receivable balance

• Unearned revenues (CREDIT BALANCES) are treated as liabilities to the entity

• Any warranties (CREDIT BALANCE) is treated as a liability to the entity

Profit and Loss Sheet• This is constructed of the Revenues and the

Expenditures

• All Revenues will have a CREDIT Balance• All Expenses will have a DEBIT Balance

• Often you will have to also work out the Cost of Goods soldo Opening Inventoryo Purchaseso Closing Inventory

This Statement tells an entity if they are making any money

Profit and Loss Continued

• Begin by listing all the Revenue streams (CREDIT Balance)

RevenueSalesInterest EarnedDividends Received

Working out Costs of Goods Sold

Figures that you need are - opening inventory- purchases - freight- closing inventory

Opening Inventory +Purchases +Freight +Cost of Goods Available for SaleLess Closing Inventory

Cost of Goods Sold

Profit and Loss Continued

• Once you have the Revenues (Credit Balance) and you have worked out the Cost of Goods Sold (Debit balance…because this is an expense)

Revenue CREDITSalesInterest EarnedDividends Received

Cost of Goods SoldOpening Inventory + DEBITPurchases +Freight +Cost of Goods Available for SaleLess Closing Inventory

Cost of Goods Sold

Gross Profit Revenue less Cost of Goods Sold

Profit and Loss Continued

• Next you list all the Expenditure (Debit Balance)• These can be listed in categories such as

administrative, selling and distribution, and general expenses

Expenditures DEBITSalaries and WagesRentLight, heat and powerDepreciation of assetsRepairs and maintenanceOther expenses

Layout of Profit and Loss Sheet

• In the first instance you will have a GROSS PROFIT – this is the Revenue less Costs of Goods Sold

• In the second instance you will have PROFIT FROM OPERATIONS – this is Gross Profit less the operating expenses

• In the third instance you may make adjustments for other incomes or other expenses to the Profit from operations- the result is the NET PROFIT BEFORE TAXES

• In the fourth instance you may have a provision for income tax which you will remove from the net profit before taxes to give you NET PROFIT AFTER INCOME TAX

Profit and Loss Sheet Layout

Revenue CREDIT $$$$$$$

Cost of Goods Sold DEBIT ($$$$$$)

GROSS PROFIT $$$$$$$

Expenditures DEBIT ($$$$$$)

PROFIT FROM OPERATIONS $$$$$$$

Other Income CREDIT $$$$$$$Other Expenses DEBIT ($$$$$$)

Net Profit Before Taxes $$$$$$$

Provision for Income Tax DEBIT ($$$$$$)

Net Profit After Taxes $$$$$$$

Trickey Things in the Profit and Loss Sheet

• You may not always be given the purchases – you may have to work this out – so know the Cost of Goods sold equation well

• Bad debts (Debit in the Profit and Loss) is NOT the Provision for Doubtful Debts (Credit in the Balance Sheet)o DR Bad debt (expensed)

• CR Provision for Doubtful debts (sometimes known as the Allowance for Doubtful Debts)

• The Provision for Doubtful debts often sits below Account Receivables in the Balance Sheet …as a contra reducing Account Receivables balance

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