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The income statement also called a profit and loss statement is a report made by company management that shows the revenue, expenses, and net income or loss for a period. Income statements usually include a heading with the name of the company, the title of the statement, and the time period. An accrued expense journal entry is a year-end adjustment to record expenses that were incurred in the current year but weren't actually paid until the next year. The matching principle dictates that all revenue and expenses need to be matched according to the year they were earned and incurred.
Even if the expense wasn't actually paid during the year, the expense should be recorded with an accrued expense journal entry and matched with the corresponding income.
The accrued expense journal entry debits the expense account that is being accrued and credits the accrued liability account. The balance sheet, also called the statement of financial position, is the third general purpose financial statement prepared during the accounting cycle. Unlike the income statement, the balance sheet does not report activities over a period of time. The balance sheet is basically a report version of the accounting equation also called the balance sheet equation where assets always equation liabilities plus shareholder's equity. Many times there will be a third subcategory for investments, intangible assets, and or property that doesn’t fit into the first two. According to the historical cost principle, all assets, with the exception of some intangible assets, are reported on the balance sheet at their purchase price. The current liabilities section is always reported first and includes debt and other obligations that will become due in the current period.
The second liabilities section lists the obligations that will become due in more than one year. A lot of times owners loan money to their companies instead of taking out a traditional bank loan. Unlike the asset and liability sections, the equity section changes depending on the type of entity.
Like all financial statements, the balance sheet has a heading that display's the company name, title of the statement and the time period of the report. Here is an example of how to prepare the balance sheet from our unadjusted trial balance and financial statements used in the accounting cycle examples for Paul's Guitar Shop. One thing to note is that just like in the accounting equation, total assets equals total liabilities and equity.
Now that the balance sheet is prepared and the beginning and ending cash balances are calculated, the statement of cash flows can be prepared. If the content you are seeing is presented as unstyled HTML your browser is an older version that cannot support cascading style sheets. After completing this course, you will be able to analyze and prepare a set of basic financial statements. To learn more about assignments and examinations, please refer to Athabasca University's online Calendar.
Athabasca University reserves the right to amend course outlines occasionally and without notice. Courses offered by other delivery methods may vary from their individualized-study counterparts. How the information about continuing and discontinuing operations improves the relevance of information for shareholders. Enroll on a full bookkeeping course to increase your earnings or even start a self employed career! Thousands of businesses, large and small, have benefited by installing a computerised accounting system. We cannot promise that computers will help you give up smoking, stop your socks smelling or make you more attractive to the opposite sex.
In the old days, a business may have moved to a manual double entry system, but this makes no sense today. If you sell goods or services on credit, you will already know that this involves a great deal of administration. If you have problems invoicing customers or collecting debts, you will benefit from computerised accounting. The output from the payroll program can be connected to a bankers electronic payment system. If yon employ more than half a dozen people, you should consider a computerised payroll program. If you buy a lot of goods or services on credit, you could benefit from the installation of a computerised purchase ledger. Your purchase ledger keeps track of how much you owe those suppliers who provide goods and services on credit. If you have large numbers of items bought on credit, you should consider a computerised accounting system.
You probably won’t see your bank manager very often, especially if your account is in credit.
Your computer will produce management reports which you can use to convince the bank that you are credit worthy.
The computer can produce the sort of information that many businesses once went to their accountant for. Most accounts software will produce a draft profit and loss account and balance sheet for the accountant to start work on.
If you want to reduce your accountant’s bills, you should consider computerised accounting.
You may not regard the idea of supplying the tax man with clear information as a benefit. If your business turnover is below the VAT registration threshold, you don’t have to account for VAT. A change in VAT status from non registered to registered, or from cash accounting to tax point accounting, could be the trigger point for you to change over to computerised accounting. With manual systems, most businesses find it hard to make time to enter even the basic book-keeping entries.

With the computer, it is possible to generate management reports which previously were the provenance of much larger companies. If you need to improve your financial reporting, you should consider computerised accounting.
Once you have taken the plunge and computerised, you will be able to harness the computer’s power to manipulate and present information. However, there are many problems and pitfalls lying in wait for anybody trying to computerise their manual accounting system. We are not saying that everything is plain sailing; the transition between manual and computerised accounts can be particularly traumatic.
These packages are designed to help individuals and very small businesses control their bank accounts. Some can track a share portfolio, produce an asset register for insurance purposes or help with VAT. With an integrated package, you could be more restricted by your knowledge of accounting theory than by the program itself. The longer established accounting software companies like Sage and Pegasus became involved in computer software in the late seventies and early eighties. These packages tend to talk about nominal ledgers, sales ledgers etc and stress their book-keeping origins rather more proudly than their integrated competitors. Some of the lower end products have dropped in price to compete with integrated packages. These systems cope with the demands of large organisations requiring sophisticated accounting solutions. Instant Accounting is a typical introductory package for small and medium sized businesses. The income statement is one of the main four financial statements that are issued by companies: balance sheet, income statement, statement of owner's equity, and statement of cash flows.
Depending on the company's size and complexity, the income statement can be large or small. In other words, expenses usually benefit the business by providing resources to produce revenue. The balance sheet is essentially a picture a company's recourses, debts, and ownership on a given day. Investors and creditors generally look at the statement of financial position for insight as to how efficiently a company can use its resources and how effectively it can finance them.
The account form consists of two columns displaying assets on the left column of the report and liabilities and equity on the right column.
Current assets consist of resources that will be used in the current year, while long-term assets are resources lasting longer than one year. The asset section is organized from current to non-current and broken down into two or three subcategories. This section is slightly different than the current section because many long-term assets are depreciated over time. In other words, they are listed on the report for the same amount of money the company paid for them. There are typically two or three different liability subcategories in the liabilities section: current, long-term, and owner debt. This usually includes trade debt and short-term loans, but it can also include the portion of long-term loans that are due in the current period.
Often times all of the long-term debt is simply grouped into one general listing, but it can be listed in detail.
Investors and creditors want to see this type of debt differentiated from traditional debt that’s owed to third parties, so a third section is often added for owner’s debt. For example, corporations list the common stock, preferred stock, retained earnings, and treasury stock. If you wish to upgrade your browser you may download Mozilla or Internet Explorer for Windows. To obtain the most up-to-date information, contact the Faculty of Business Student Support Centre at 1-800-468-6531. You will begin by examining the accounting cycle of a sole proprietorship in the service sector, learning how financial transactions are processed through the accounting information system each accounting period. We do, however, feel that we ought to start this course with a summary of the benefits which computerisation can bring to your business.
Using tax and national insurance tables for even a small number of employees is very time consuming.
Not only will it generate employees’ payslips automatically, it will also produce your year-end tax returns as well.
The payroll program will remember all these details and calculate wages and salaries accordingly.
This way, the wages calculated by the program are transmitted to the employees’ bank accounts automatically. Provided your book-keeping has been done conscientiously, your accountant won’t be shedding any tears.
However, in our experience, clearly presented tax information can save a great deal of time in form filling and answering follow-up questions.
Tax point accounting for VAT by hand is a nightmare which involves a great deal of administration. There is little time left to discover what those entries mean in terms of business performance. Once you have mastered the basics, you can develop the financial reporting as far as you want. The effort of installing a computerised accounting system will be repaid many times over.
This puts you in control of the business so that it works for you rather than the other way round. If the following chapters sound like a catalogue of disasters, remember that thousands of small businesses have installed computerised accounts successfully. However, if the problems listed in this chapter are familiar to you, computerised accounting could deliver real benefits.

For the size of business we are considering in this book, the computer will probably have an Intel chipset running the Windows operating system.
One even offers an interface with an invoicing package, reminiscent of the modular approach of the larger packages. Although they are excellent products in their own right, they do not have the business emphasis which we need. They comprise a single self-contained, integrated package which covers most financial aspects. Whereas their predecessors tended to mimic manual systems on the computer, integrated packages really flex the computer’s ability to solve the book-keeping problem. You can also access any part of the system so there are very few restrictions on the way you work. The complete system is expensive but it will handle large amounts of data and perform more complex accounting functions. This has prompted software suppliers to write packages for specific industries like the insurance industry, hotel, motor trades and builders.
A January income statement for example would show all the income and expenses for the month. A condensed income statement will have three main categories: revenues, expenses, and net income or loss.
If an expense was incurred during the year, it must be matched to the revenue that was created from the expense during the year.
This is why the balance sheet is sometimes considered less reliable or less telling of a company's current financial performance than a profit and loss statement.
This structure helps investors and creditors see what assets the company is investing in, being sold, and remain unchanged.
Thus, the assets are typically listed with a total accumulated depreciation amount subtracted from them. This typically creates a discrepancy between what is listed on the report and the true fair market value of the resources.
If you are preparing a balance sheet for one of your accounting homework problems and it doesn't balance, something was input incorrectly. Investors, creditors, and internal management use the balance sheet to evaluate how the company is growing, financing its operations, and distributing to its owners. As of January 1, 2011, all publically accountable enterprises (PAEs) in Canada must prepare financial statements that comply with IFRS.
Your manual book-keeping records cannot produce management reports automatically like the computer can. For employees who are paid the same amount each period, you don’t even need to update the amount — just run the payroll! This is because much of your accountant’s cost may be incurred checking your manual book-keeping records. However, once information has been entered into a computer, it can be analysed automatically by the program to give meaningful reports. We anticipate that most people reading this book will not need this type of system  yet! At the end of December, Jen has incurred 15 days worth of electrical expenses but won't actually pay them until January 15th. Annual income statements look at performance over the course of 12 months, where as, the statement of financial position only focuses on the financial position of one day.
A single sheet won’t tell you that much about the company, but a comparative report that shows two to three years of trend will tell you how cash is being spent, the amount of debt being paid off, and the level of investments being made each year. Private enterprises (PEs) in Canada will be permitted to use either IFRS or Generally Accepted Accounting Principles (GAAP) for PEs as detailed in a new section of the revised CICA Handbook.
Eventually you would need a cashbook a metre wide, and you still wouldn’t be able to record all of the details required! Even if you are accounting for VAT under the simplified cash accounting scheme, you will still find computerised VAT accounting a real boon. The amount of payroll in December should be recorded in December with an accrued expense journal entry and accounted for on that year's income statement. Ratios like the current ratio are used to identify how leveraged a company is based on its current resources and current obligations. This is consistent with the balance sheet definition that states the report should record actual events rather than speculative numbers. Despite the silly assertion to the contrary, mistakes are hardly ever the computer’s fault. These adjustments include accruals, prepayments, depreciation, tax allowable versus non tax allowable expenditure etc. However, if you are thinking of buying one of these packages, check whether the software company has enough customers to make it financially worthwhile for them to continue supporting the package.
These weekly or monthly income statements help management evaluate the company's performance. After the expenses are totaled, net income can be calculated by subtracting the total expenses from the total income.
If the computer makes a mistake, it is usually because a human gave it the wrong information to start with!
How would you feel if you were totally dependent on one industry-specific accounting package and the package developed problems after the software supplier stopped trading? Quarterly and annual income statements are more commonly used by investors and creditors to track the overall performance of the company. However, even if the computer produces accounts which need adjustments, you will still have saved a great deal of time, effort and money along the way.

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