2.

02 - NOTES

Students must understand the concepts listed below to be able to apply the procedures
to prepare financial statements for a sole proprietorship.

▪ A fiscal period is the specific length of time covered by the financial reports of a
business. For example, an annual report covers a fiscal period of one year, but a
quarterly report includes accounting data for three months. At the end of the fiscal
period, the financial information of the business is summarized and reported.

▪ A worksheet is a columnar accounting form that is used to summarize the general

ledger information needed to prepare the financial statements for a business. A
worksheet is used to:
⬧ Summarize general ledger account balances to prove debits equal credits.
⬧ Plan changes to bring the general ledger accounts up to date.
⬧ Separate the general ledger account balances in order to prepare the financial
statements.
⬧ Calculate net income or net loss.

▪ An income statement reports net income or net loss over a defined period of time.
It is prepared from the Income Statement section on the worksheet and provides
information needed to make good business decisions.

▪ A balance sheet summarizes what a business owns, what a business owes, and
the current net worth on a specific date. It is prepared from the Balance Sheet
section on the worksheet.

▪ The GAAP Matching Principle is one of the fundamental guidelines established by

the Financial Accounting Standards Board and states that each expense item
related to revenue earned must be recorded in the same accounting period as the
revenue it helped to earn. (GAAP = Generally Accepted Accounting Principles)

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 CONTENT

I. Procedures for Preparing a Worksheet

A. Enter the heading of the worksheet.
1. Write the company name on the first line.
2. Write the name of the document being prepared on the second line.
3. Write the date of the document, For the Month Ended July 31, 20--, on the
third line.
B. Prepare the Trial Balance section of the worksheet.
1. Write the general ledger account titles in the Account Title column.
2. Write the general ledger debit balances in the Debit column and the
general ledger credit balances in the Credit column.
3. Rule a single line across the two Trial Balance columns below the last
amounts. (A single line drawn under a column means that the amounts
above the line are ready to be totaled.)
4. Add each column. If the two column totals are the same, then debits equal
credits in the general ledger accounts. If not, check and correct errors.
5. Write the total of each column below the single line.
6. Rule double lines across both Trial Balance columns. (Double lines mean
that the totals just above the ruling have been verified as correct and no
other entries need to be made.)
C. Prepare the adjustments in the Adjustments section of the worksheet.
(Only those using SW Books)
1. Write the debit amount in the Adjustments Debit column and the credit
amount in the Adjustments Credit column. The adjustment amount equals
the ending balance in the account minus the amount on hand at the end of
the fiscal period.
2. Rule a single line across the two Adjustments columns on the same line as
the single line for the Trial Balance columns.
3. Add both Adjustments columns. If the two amounts are the same, then
debits equal credits. If not, check and correct errors.
4. Rule double lines across both Adjustments columns to show that the totals
have been verified as correct.
D. Extend the balance sheet account balances to the Balance Sheet section on
the worksheet. (Note: Those using the SW books will have to update their
accounts with the adjustments.)
E. Extend the income statement account balances to the Income Statement
section on the worksheet. (Note: Those using the SW books will have to
update their accounts with the adjustments.)
F. Calculate and record net income or net loss on the worksheet.
G. Total and rule the worksheet.
1. Rule a single line across the four Income Statement and Balance Sheet
columns.
2. Add each of the Income Statement and Balance Sheet columns and write
the totals below the single line.

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 3. Calculate net income or net loss by subtracting the Income Statement
Debit column from the Income Statement Credit column. Note: If Sales
(total revenues) are greater than Expenses, the company has net income.
If Sales (total revenues) are less than Expenses, the company has a net
loss. Write the words Net Income or Net loss in the Account Title column
on the same line as the amount calculated. If the company has net
income, record the amount under the Income Statement Debit column. If
the company has a net loss, record the amount under the Income
Statement Credit column.
4. Rule a single line across the four Income Statement and Balance Sheet
columns just below the net income or net loss amount.
5. If a net income was calculated, then the amount of net income is written
under the subtotal in the Balance Sheet Credit column. If a net loss was
calculated, then the amount of net loss is written under the subtotal in the
Balance Sheet Debit column.
6. Rule a single line under the net income or net loss amount across all four
Income Statement and Balance Sheet columns.
7. Add the subtotal and net income (or net loss) for each column to get
proving totals for the Income Statement and Balance Sheet columns. Write
the totals below the single line. Check for equality in each pair of columns.
8. Rule double lines across the Income Statement and Balance Sheet
columns.

II. Procedures for Preparing an Income Statement

A. Enter the heading of the income statement.
1. Center the name of the company on the first line.
2. Center the name of the report on the second line.
3. Center the date of the report, For the Month Ended, July 31, 20--, on the
third line.
B. Prepare the Revenue, Expenses, and Net Income sections.
1. Write the name of the first section, Revenue, at the left of the wide column
on the first line.
2. Write the title of the revenue account, Sales, on the next line, indented from
the margin.
3. Record the balance of the Sales account on the same line in the second
amount column.
4. Write the name of the second section, Expenses, at the left of the wide
column on the next line.
5. Write the title of each expense account in the wide column, indented from
the margin.
6. Write the balance of each expense account in the first amount column on
the same line as the account title.
7. Rule a single line across the first amount column under the last expense
account balance to indicate addition.
8. Write the words Total Expenses on the next blank line indented from the
margin in the wide column.

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 9. Record the amount of total expenses on the same line in the second
amount column.
10. Calculate and verify the amount of net income or net loss.
a. Calculate net income or net loss by subtracting total expenses from
total revenue. (If expenses are greater than sales then there is a net
loss.)
b. Compare the amount of net income (or loss) with the net income (or
loss) amount on the worksheet. If the amounts are not the same, an
error has been made and must be corrected.
11. Rule a single line across the second amount column just below the total
expenses.
12. Write the words Net Income (or Net Loss) on the next line at the left margin
of the wide column.
13. On the same line, record the amount of net income (or net loss) in the
second amount column.
14. Rule double lines across both amount columns below the amount of net
income to show that the amount has been verified as correct.
C. Calculate the component percentages – the percentage relations between one
financial statement item and the total that includes that item.
1. Total Expense Component Percentage = Total Expenses ÷ Total Sales
2. Net Income Component Percentage = Net Income ÷ Total Sales

III. Procedures for Preparing a Balance Sheet

A. Enter the heading of the balance sheet.
1. Center the name of the company on the first line.
2. Center the name of the report on the second line.
3. Center the date of the report, July 31, 20--, on the third line.
B. Prepare the Assets and Liabilities sections of the balance sheet.
1. Write the title of the first section, Assets, in the middle of the left wide
column.
2. Write the title of all asset accounts under the heading.
3. Record the balance of each asset account in the left amount column on the
same line as the account title.
4. Write the title of the next section, Liabilities, in the middle of the right wide
column.
5. Write the titles of all liability accounts under the heading.
6. Record the balance of each liability account in the right amount column on
the same line as the account title.
7. Rule a single line across the right amount column under the last amount to
indicate addition.
8. Write the words Total Liabilities in the right wide column on the next blank
line.
9. Record the total of all liabilities in the right amount column.

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 C. Prepare the Owner’s Equity section of the balance sheet.
1. Write the title of the section, Owner’s Equity, in the middle of the right wide
column on the next line below Total Liabilities.
2. Write the title of the owner’s capital account on the next line.
3. Record the current amount of owner’s equity in the right amount column.
a. Current Capital = Capital account balance plus Net Income minus
Drawing account balance
b. Current Capital = Capital account balance minus Net Loss minus
Drawing account balance
4. Rule a single line under the last amount in the longer left amount column.
5. Rule a single line in the right amount column on the same line.
6. Write the words Total Assets on the next line in the left wide column.
7. Record the amount of total assets in the left amount column.
8. Write the words Total Liabilities and Owner’s Equity in the right wide
column on the same line as Total Assets.
9. Record the amount of total liabilities and owner’s equity in the right amount
column.
10. Compare the totals of the two amount columns. The total should be in
balance – assets should equal liabilities plus owner's equity.
11. Rule double lines across both the left and right amount columns just below
the column totals to show that the totals have been verified as correct.

KEY TERMS

• Fiscal period • Income statement

• Worksheet • Net income
• Trial balance • Net loss
• Adjustments • Matching Principle
• Balance sheet • Ruling

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 2.02 Trial Balance

TechKnow Consulting
Worksheet
For Month Ended August 31, 20--
1 2
Account Title Trial Balance
Debit Credit

1 Cash 4964.00 Step 1: Write the general ledger

2 Petty Cash 100.00 account titles.
AR/Oakdale
150.00
3 School
AR/Campus
100.00
4 Internet Café
5 Supplies 1025.00 Step 2: Write the general ledger debit
Prepaid
1200.00
6 Insurance account balances. Write the general
7 AP/Supply Depot 200.00 ledger credit account balances.
AP/Thomas
8 Supply Co. 50.00
9 Kim Park, Capital 5000.00
Kim Park,
625.00
10 Drawing Step 3: Rule a single line across the two
11 Income Summary Trial Balance columns.
12 Sales 3565.00
Advertising
213.00
13 Expense
Insurance
14 Expense Step 4: Add both the Trial Balance Debit
Miscellaneous
28.00
15 Expense and Credit columns.
16 Rent Expense 300.00
Supplies
17 Expense
18 Utilities Expense 110.00 Step 5: Write each column's total below
19 8815.00 8815.00 the single line.
20

Step 6: Rule double lines across both

Trial Balance columns.

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2.02 Worksheet

Extend Balance Sheet Account Balances on a Worksheet

1. Extend the Debit balances without adjustments to the Balance Sheet column.
2. Extend the Debit balances with adjustments to the Balance Sheet column.
3. Extend the Credit balances without adjustments to the Balance Sheet column.

Extend Income Statement Account Balances on a Worksheet

1. Extend the Sales balance to the Income Statement column.

2. Extend the Expense balances without adjustments to the Income Statement column.
3. Extend the Expense balances with adjustments to the Income Statement column.

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 2.02 Worksheet

Roadrunner Delivery Service

Worksheet

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 2.02 Worksheet

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2.02 Adjustments

Adjustments:
Supplies Account Balance _______________
- Supplies on Hand
= Supplies Used during the Month _______________

Prepaid Insurance Account Balance _____________

- Prepaid Insurance on Hand _______________
= Prepaid Insurance Used during the Month _________

1. Write the debit amount in the Adjustments Debit column.

2. Write the credit amount in the Adjustments Credit column.

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 2.02 Adjustments

Adjustments:
Supplies Account Balance $1025.00
- Supplies on Hand $ 310.00
= Supplies Used during the Month $ 715.00

Prepaid Insurance Account Balance $1200.00

- Prepaid Insurance on Hand $1100.00
= Prepaid Insurance Used during the Month $ 100.00

1. Write the debit amount in the Adjustments Debit column.

2. Write the credit amount in the Adjustment Credit column.

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 2.02 Income Statement

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 2.02 Income Statement

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 2.02 Income Statement

Sales 3565.00 100.0%

Advertising Expense 213.00

Insurance Expense 100.00

Miscellaneous Expense 28.00

Rent Expense 300.00

Supplies Expense 715.00

Utilities Expense 110.00

Total Expenses 1466.00 41.1%

Net Income 2099.00 58.9%

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 2.02 Balance Sheet

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2.02 Balance Sheet

Roadrunner Delivery Services

Balance Sheet

October 31, 20--

Assets Liabilities

Cash in Bank 21125.00 AP/Beacon Advertising 75.00

AR/City News 1450.00 AP/North Shore Auto 11650.00

AR/Green Company Total Liabilities 11725.00

Computer Equipment 3000.00 Owner’s Equity

Office Equipment 200.00 M. Sanchez, Capital 26050.00

Delivery Equipment 12000.00

Total Assets 37775.00 Total Liab. & Owner’s Eq. 37775.00

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2.02 Balance Sheet

TechKnow Consulting

Balance Sheet

August 31, 20--

Assets Liabilities v

Cash 4964.00 AP/Supply Depot 200.00

Petty Cash 100.00 AP/Thomas Supply 50.00

AR/Oakdale School 150.00 Total Liabilities 250.00

AR/Campus Int. Cafe´ 100.00 Owner’s Equity

Supplies 310.00 Kim Park, Capital 6474.00

Prepaid Insurance 1100.00

Total Assets 6724.00 Total Liab. & Owner’s Eq. 6724.00

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2.02 Key Terms

Term Definition
Fiscal period The specific length of time (a month, a quarter, or a
year) covered by the financial reports of a business
A columnar accounting form that is used to
Worksheet summarize the general ledger information needed to
prepare the financial statements for a business
A proof of the equality of debits and credits in a
Trial balance general ledger

Changes recorded on a worksheet to update the

Adjustments general ledger accounts at the end of a fiscal period

Summarizes what a business owns, what a business

Balance sheet owes, and the current net worth on a specific date
Reports net income or net loss financial information
Income statement over a defined period of time
The difference between total revenue and total
expenses when the total revenue is greater than total
Net income
expenses

The difference between total revenue and total

expenses when total expenses are greater than total
Net loss
revenue

A GAAP principle that requires matching expenses

incurred in an accounting period with the revenue
Matching Principle
earned in the same period

A single line drawn under a column to indicate that

the amounts above the line are ready to be totaled
Ruling A double line drawn under a column to indicate that
the amounts just above the ruling are totals and no
other entries need to be made

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