Balance Sheet Income Statement Owner’s Equity Statement.

The Balance Sheet and the Income Statement are financial statements◦ Balance SheetBalance Sheet: Details the condition of the business on a

specific date◦ Income Statementome Statement: Details revenue and expense transactions

over a specific time Balance Sheet: Assets, Liabilities and Owner’s Equity

◦ Provides a “snapshot” of the financial condition of a business at a given point in time.

◦ Remember - Accounting Equation must always be in balance. Assets = Liabilities + Owner’s Equity (Owners Equity represents

the Net Worth of the owner).

Income Statement: Revenues & Expenses◦ Provides information related to the amount of Revenues and

Expenses incurred for a given period of time (fiscal period). One month in the case of the sample case

◦ (Revenue minus Expenses = Net Income (profit) or Net Loss) Question: Who is interested in reviewing these financial

statements and why? Financial statements are often reviewed by and

distributed to:◦ Owners, Creditors, Investors, Managers, and sometimes

Customers. Should always be presented in a professional format.

Use the completed eight-column worksheet to prepare the Balance Sheet and Income Statement◦ See completed Balance Sheet & Income Statement solutions

Reflects the changes to the equity in the business over a given period of time.

Essential elements◦ <Owner Name>, Capital balance from the beginning of the

fiscal period◦ Add Net Income (subtract a loss)◦ Subtract withdrawals made by the owner◦ Add additional investments made by the owner

Use the completed eight-column worksheet to prepare the Owner’s Equity Statement◦ See completed Owner’s Equity Statement solutions

Review the completed financial statements. Is this business a good candidate for a business loan?

◦ Why / why not?◦ Would you invest your savings into this business?◦ What else needs to be known?

Determine missing transactions not accounted for. Discuss “Vertical” and “Horizontal” analysis.

Vertical: Each amount on a financial statement as a percentage of another item. Allows comparison to other businesses.

Horizontal: Compares financial statements across fiscal periods. Is also referred to as “Trend Analysis.”

Understanding the basics of double entry accounting will help you with future entrepreneurial plans or business projects.

We hope this project enables you with a better grasp of financial management – the backbone of any effective business plan.

The End