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					                                                                  Chapter

                                                                      2
Analyzing Business Transactions

Section 2: The Accounting Equation and Financial
            Statements
               Section Objectives
             3. Analyze the effects of business transactions on a firm’s
                assets, liabilities, and owner’s equity and record these
                effects in accounting equation form.
             4. Prepare an income statement.
             5. Prepare a statement of owner’s equity and a balance
                sheet.
Objective 5

Prepare the. . .
The Statement of Owner’s Equity
and the Balance Sheet
QUESTION:


      What is a statement of owner’s equity?


ANSWER:


      A statement of owner’s equity is a
      formal report of changes that
      occurred in the owner’s financial
      interest during a reporting period.
 The statement of owner’s equity
    has a three-line heading.


                       JT’s Consulting Services
                     Statement of Owner’s Equity
                    Month Ended December 31, 2007



Jason Taylor, Capital, December 1, 2007                  $90,000.00
Net Income for December                    $27,500.00
Less Withdrawals for December                4,000.00
Increase in Capital                                       23,500.00
Jason Taylor, Capital, December 31, 2007                $113,500.00
                                    37
 The statement of owner’s equity shows the
   capital at the beginning of the period.


                       JT’s Consulting Services
                     Statement of Owner’s Equity
                    Month Ended December 31, 2007



Jason Taylor, Capital, December 1, 2007                   $90,000.00
Net Income for December                      $27,500.00
Less Withdrawals for December                  4,000.00
                                                            23,500.00
Increase in Capital                                       $113,500.00
                                     37
Jason Taylor, Capital, December 31, 2007
  Net income or net loss for the
        period is included.


                        JT’s Consulting Services
                      Statement of Owner’s Equity
                     Month Ended December 31, 2007



Jason Taylor, Capital, December 1, 2007                   $90,000.00
Net Income for December                      27,500.00
Less Withdrawals for December                 4,000.00
Increase in Capital                                        23,500.00
Jason Taylor, Capital, December 31, 2007                 $113,500.00
                                    37
    The withdrawals and additional
 investments for the period are shown.


                       JT’s Consulting Services
                     Statement of Owner’s Equity
                    Month Ended December 31, 2007



Jason Taylor, Capital, December 1, 2007                 $90,000.00
Net Income for December                     27,500.00
Less Withdrawals for December                4,000.00
Increase in Capital                                       23,500.00
Jason Taylor, Capital, December 31, 2007                $113,500.00
                                    37
  The increase or decrease in
capital for the period is reported.


                        JT’s Consulting Services
                      Statement of Owner’s Equity
                     Month Ended December 31, 2007



Jason Taylor, Capital, December 1, 2007                   $90,000.00
Net Income for December                      27,500.00
Less Withdrawals for December                 4,000.00
Increase in Capital                                        23,500.00
Jason Taylor, Capital, December 31, 2007                 $113,500.00
                                      37
     The result is the capital
 balance at the end of the period.


                        JT’s Consulting Services
                      Statement of Owner’s Equity
                     Month Ended December 31, 2007



Jason Taylor, Capital, December 1, 2007                  $90,000.00
Net Income for December                      27,500.00
Less Withdrawals for December                 4,000.00
Increase in Capital                                        23,500.00
Jason Taylor, Capital, December 31, 2007                 $113,500.00
                                     37
              Additional Investments
   Note that Jason Taylor did not make any additional investments in
    December.

   Additional investments such as cash or equipment would appear in a
    new line in the statement of owner’s equity.

   An investment made in a form other than cash is recorded at its fair
    market value.
The balance sheet has
 a three-line heading.

                                 JT’s Consulting Services
                                      Balance Sheet
                                    December 31, 2007

                    Assets                                           Liabilities

      Cash                    83,500.00      Accounts Payable                        7,000.00
      Accounts Receivable      5,000.00
      Supplies                 3,000.00
      Prepaid Rent             7,000.00                           Owner’s Equity
      Equipment               22,000.00      Jason Taylor, Capital                  113,500.00
      Total Assets           120,500.00      Total Liabilities and Owner’s Equity   120,500.00



   A single line shows that the amounts above it are being added or
    subtracted. A double line indicates final amounts for the column or section
    of a report.
              JT’s Consulting Services
                 Income Statement
           Month Ended December 31, 2007

              JT’s Consulting Services
            Statement of Owner’s Equity
           Month Ended December 31, 2007

              JT’s Consulting Services
                   Balance Sheet
                 December 31, 2007



Notice any difference in the date line??
The Importance of
Financial Statements
      The Importance of Financial
             Statements

                 Business managers and
                  owners use the balance
                  sheet and the income
                  statement to control current
                  operations and plan for the
                  future.

 Creditors, prospective
investors, governmental
agencies, and others are
interested in the profits of
the business and in the
asset and equity structure.
Financial statements are prepared in
a specific order:

1st Income Statement

2nd Statement of Owner’s equity

3rd Balance Sheet
                          JT’s Consulting Services
                             Income Statement
                       Month Ended December 31, 2007
       Revenue
        Fees Income                                         $35,000.00
       Expenses
        Salaries Expense                         7,000.00
        Utilities Expense                          500.00
           Total Expenses                                    7,500.00
       Net Income                                           $27,500.00


                          JT’s Consulting Services
                        Statement of Owner’s Equity
                       Month Ended December 31, 2007

Jason Taylor, Capital, December 1, 2007                          $90,000.00
Net Income for December                    37   27,500.00
Less Withdrawals for December                    4,000.00
Increase in Capital                                              23,500.00
Jason Taylor, Capital, December 31, 2007                        $113,500.00
                           JT’s Consulting Services
                         Statement of Owner’s Equity
                        Month Ended December 31, 2007

Jason Taylor, Capital, December 1, 2007                                  80,000.00
Net Income for December                             22,400.00
Less Withdrawals for December                        3,000.00
Increase in Capital                                                      19,400.00
Jason Taylor, Capital, December 31, 2007                                113,500.00



                              JT’s Consulting Services
                                   Balance Sheet
                                 December 31, 2007
                  Assets                                        Liabilities
     Cash                  $83,500.00      Accounts Payable                            $7,000.00
     Accounts Receivable     5,000.00
     Supplies                3,000.00
     Prepaid Rent            7,000.00                          Owner’s Equity
     Equipment              22,000.00      Jason Taylor, Capital                       113,500.00
     Total Assets        $ 120,500.00      Total Liabilities and Owner’s Equity      $ 120,500.00
SECTION
                   Complete the following sentences:
 R
                fundamental accounting equation
          The _____________________________ is
 E        the relationship between assets and
          liabilities plus owner’s equity.

 V        Revenue
          ________ is the inflow of money or other
          assets that results from the sales of goods
  I       or services or from the use of money or
          property.

 E
          An increase in expense leads to a
          ________
          decrease in owner’s equity.
 W
SECTION
                   Complete the following sentences:
 R
          The financial statement that is dated as of
 E                              balance sheet
          a single date is the _____________.


 V             income statement
          The ________________ shows the results
          of business operations for a specific
  I       period of time such as a month, a quarter,
          or a year.

 E             statement of owner’s equity
          The ________________________ reports
          the changes that occurred in the owner’s
 W        financial interest during the reporting
          period.
       Thank You
             for using

College Accounting, 11th Edition



      Price • Haddock • Brock

				
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