INTRODUCTION TO BALANCE SHEET AND INCOME STATEMENT

INTRODUCTION

TO

BALANCE SHEET AND INCOME STATEMENT

The current presentation will provide an introduction to two of the most important financial statements. We will begin by looking at an individual's set of accounts for the month of August and on how things stand of the first day of September. The individual ? Charlie ? wants to understand how he did financially the previous month and where he stands now. The next slide is a list of accounts that Charlie has provided us. We need to organize this information in a useful way.

Charlie's accounts during August and on the first day of September

Account Balance on Car Loan on Sept. 1 Balance on Student Loan on Sept. 1 Value of Car on Sept. 1 Cash on Hand on Sept. 1 Dividends earned on Stock Holdings for the month Food & Entertainment for the month Gas for the month Interest Earned on Savings Deposit Interest Paid on Car Loan during month Interest Paid on Student Loan during month Monthly Rent Monthly Salary Monthly Taxes Savings Account Balance on Sept. 1 Value of Stocks on Sept. 1 Work Related Luncheons during month

Amount 9,000

18,000 21,700 $1,275

175 500 275

25 50 100 1,800 $4,000 200 5,025 4,000 325

Begin by organizing the accounts not by alphabetical order or magnitude, but rather by whether the account

describes (1) what happened during the month of August and (2) accounts being recognized on the particular day of September 1st.

The accounts describing the time period of the month of August will go onto the income statement. Once you have identified these accounts, then separate them into revenue (or, income) and expenses. The income statement takes the following general form ? though we shall see variations on this shortly.

REVENUE

- EXPENSES NET INCOME

? revenue may also be termed income or gross earnings ? Net income is also termed profit, net profit, or earnings

The accounts describing the point in time of September 1st will go onto the balance sheet. Consider which of these accounts represent things that Charlie has (i.e., assets) and what he owes (i.e., liabilities). The balance sheet takes the following general form ? again, we'll see cases where a slight rearrangement may prove useful for a particular purpose. We will usually use a vertical layout for the balance sheet, though when doing individual transactions the horizontal layout will save us space.

ASSETS = LIABILITIES + EQUITY

? Equity goes under various labels depending upon the type of entity. For example, equity would typically be termed "net worth" for an individual's balance sheet. Equity would be termed "shareholder equity" for a corporation. A small business might use the term "owner's equity". Nonprofit organizations normally use the term "net assets" for equity. Often, the nonprofit and the individual mentally (but not for presentation) rearrange the balance to solve for equity. Equity (net worth, net assets) = Assets ? Liabilities

Let's organize the Charlie's accounts to form a simple income statement for the month of August.

Charlie's Income Statement for the Month of August

Revenue Monthly Salary Interest Earned on Savings Deposit Dividends earned on Stock Holdings Total revenue

Expenses Food & Entertainment Gas Interest Paid on Car Loan Interest Paid on Student Loan Monthly Rent Monthly Taxes Work Related Luncheons Total expenses

Net Income

$4,000 25

175 4,200

500 275

50 100 1,800 200 325 3,250

950

? Notice how the income statement allows us to easily see Charlie's income (revenue) for the month, his expenses, and what he had left over (net income). At the very least we can say that Charlie was able to save $950 during the month.

? We might be interested in a slightly more complicated way to structure the income statement. For example, we might want to group revenue/expenses associated with the same activities.

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