Preparation of Balance Sheet and Income Statement
Balance sheet indicates structure of the assets belonging to the company and financial means used to finance these assets at a particular point of time. For example: this statement as of December 31, 2006 indicated structure of the assets and how they are finances on December 31, 2006.
This statement is made on the basis of accounting equation, i.e. assets are equal to the sum of liabilities and owners’ equity. The assets side includes current and long-term assets. Liabilities and owners’ equity side includes current and long-term liabilities, owners’ equity consisting of share capital, retained earnings, i.e. net profit earned and retained in the business.
Income statement indicates income earned and expenses incurred by the company for a particular period of time. For example: this statement for the year 2006 indicated, what income was earned and what expenses were incurred by the company during the year 2006. Difference between all income and all expenses is called net profit for the year.
Starting point of preparing financial statements is adjusted trial balance, which includes list of all general ledger accounts with the balances in those accounts.
Worth to notice several important points:
1. Accumulated depreciation account has a credit balance. As it was explained earlier this account is contrary to the fixed assets account, in Alfa’s case Equipment account. In the financial statements on the assets’ side difference between cost of fixed assets and accumulated depreciation, called net book value, is indicated
2. Balances of income and expenses are included into the income statement
3. Net profit retained in the business (5883$) from income statement is transferred to the balance sheet under owners’ equity part
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Return from Preparation of Balance Sheet and Income Statement to Accounting Cycle
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