FINANCIAL STATEMENTS

You can do the same for your other fixed assets – and repairs and maintenance for each fixed asset.

FINANCIAL STATEMENTS

You’ve seen the income statement and balance sheet as these appear in the work sheet. The final step is to put these in their acceptable formats. For the income statement, this normally has a heading that has the name of the business on the first line, the words “Income

Statement” on the second line, and the words “For the Period Ended (date)” on the third line.

Income Statement

The income statements will show whether the business made a profit or suffered a loss for a given period. Broadly, we want to know if revenues are greater than expenses for a given month, a quarter or year.

If your business provided services, then your income statement would be similar to the one below:

Revenues

Less: Cost of Services Gross Income

Less: Administrative & Operating Expenses Net Income from Operations

Income before Income Tax Net Income after Taxes

Consists of all related costs to provide the service required, such as:

• salaries, bonuses, and benefits

• communication, travel and related expenses

of personnel directly providing the service. Also included is the cost of the required parts, plus freight charges, if any.

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If it were in merchandising, then the income statement would look like –

Sales

Less: Cost of Goods Sold Gross Income

Less: Administrative & Operating Expenses Net Income from Operations

Income before Income Tax Net Income after Taxes

This is derived as follows:

Beginning merchandise inventory Add: Net purchases

Cost of goods available for sale

Less: Ending merchandise inventory Cost of Goods Sold

If your business was in manufacturing, then the income statement would appear similar to the one below:

Sales

Less: Cost of Goods Sold Gross Income

Less: Operating Expenses Net Income from Operations Income before Income Tax

Computed as follows:

Finished goods inventory, Jan. 1, 20__

Add: Cost of goods manufactured Cost of goods available for sale

Less: Finished goods inventory, Dec. 31, 20__

Net Income after Taxes Cost of goods sold

Note: We omitted goods-in-process, beginning and goods-in-process, ending to simplify matters.

This is derived as follows:

Raw materials inventory, Jan. 1, 20__

Add: Raw materials purchases Total raw materials available

Less: Raw materials inventory, Dec. 31, 20__

Add: Direct labor

Raw materials used

Cost of Goods Manufactured

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Balance Sheet

While the income statement shows how a business performed within a given period, the balance sheet gives a picture of the business as of a given date – which appears on the third line of the balance sheet heading.

Essentially, it is based on the accounting equation of Assets = Liabilities + Equity. The main difference among the different types of business – services, trading, and manufacturing – would be in the classification of the inventories, which are asset accounts.

Another difference will be in the equity portion, the presentation of which will vary

depending on the type of ownership. For a single proprietorship, the equity is simply labeled

“Owner’s Capital.” For a partnership, ownership can be represented as: Mr. A_____, Capital; Mr. B_____, Capital; and Mr. C_____, Capital to indicate their individual contributions. In the case of corporations and cooperatives, showing the equity is not that simple.

Instead of owner’s capital, the term used for corporate balance sheets is stockholder’s equity.

This refers to the capital contributions made by its owners – whether partial or in full payment of the subscribed capital stock. Income realized by the company is added to the capital, while losses incurred are deducted from the capital account.

Corporations raise capital from the contributions of the owners. The extent of their individual contributions can be seen in the number of shares of stock each one owns. This in turn, is recorded in the stock and transfer book, not in the equity portion of the balance sheet.

Let’s assume that a corporation has 2,000 shares with a par value of P100 per share. This is the number and par value in its Articles of Incorporation and approved by the Securities and Exchange Commission. In other words, its authorized capital stock is P100,000 of which 25% should be subscribed. However, to begin its operations, only 25% of the subscribed shares need to be paid-up. After 18 months of operations, the company realized a net income after taxes of 60,000. Thus, the equity portion would look like this.

Stockholders’ Equity

Common Stock – par value P1,000.00 Authorized, 2,000 shares

Subscribed, 500 shares

Paid-Up, 125 shares P 125,000.00 Retained earnings (losses) 90,000.00 Total Stockholders’ Equity P 2 15,000.00

This refers to the accumulated income or losses of the company from the start of its operations up to the last audited year.

Please note that there are other ways of presenting this portion of the balance sheet. For cooperatives, equity is presented differently.

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Members’ Equity

Common Share Capital Authorized ________ shares at P____ par value Subscribed Share Capital Common

Less: Subscriptions Receivable Common Paid Up Common Share Capital

For an overview of the whole recording and accounting process, see the Figure 1 on the next page. However, please confer with a good accountant to set up your books of accounts and to initiate you into the recording process. Once you get used to it, recording will almost be mechanical and routine. Doing it regularly will pay dividends in the future. Remember what the price of ignorance or neglect will be for you!

SUMMARY

You have just been walked through a very simplified process of bookkeeping. This was followed with the preparation of expanded versions of the journal and the ledger. Finally, you were introduced to the general forms of income statement for the three types of business (manufacturing, service, and trading) and balance sheet for a corporation and a cooperative.

There is nothing like knowing how to keep track of your business, how it is doing, and if it is going as planned. The financial statements give a complete picture of where your business is at a certain point.

You may now proceed to the last part of the Workbook and prepare your financial plan. set aside as required by law. The reserve fund

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