Understand Financial Statements
In order to get a better understanding of financial statements, what they communicate to the users of accounting information, and how the statements are connected, we will use the final balances as of January 31, 20XX for a fictitious delivery-service company, Metro Courier Inc. Just as a financial accountant would do, we will use these figures to prepare the company’s financial statements required by GAAP. Let’s look at Metro Courier’s financial information and prepare some financial statements.
| Balance of Accounts for Metro Courier Inc. as of January 31, 20XX | ||
|---|---|---|
| Item | Item Type | Dollar Amount |
| Cash | Asset | $ 66,800 |
| Accounts Receivable | Asset | $ 5,000 |
| Supplies | Asset | $ 500 |
| Prepaid rent | Asset | $ 1,800 |
| Equipment | Asset | $ 5,500 |
| Truck | Asset | $ 8,500 |
| Accounts Payable | Liability | $ 200 |
| Common Stock | Equity | $ 30,000 |
| Retained Earnings (beginning balance) | Equity | $ 0 |
| Service Revenue | Revenue | $ 60,000 |
| Salary Expense | Expense | $ 900 |
| Utilities Expense | Expense | $ 1,200 |
Income Statement
The income statement, sometimes called an earnings statement or profit and loss statement, reports the profitability of a business organization for a stated period of time. In accounting, we measure profitability for a period, such as a month or year, by comparing the revenues earned with the expenses incurred to produce these revenues.
The income statement contains the following:
- Revenues are the inflows of cash resulting from the sale of products or providing services to customers. We measure revenues by the prices agreed on between the business and customer.
- Expenses are the costs incurred to produce revenues. In other words, expenses are costs of doing business (typically identified as accounts with the word “expense”).
- Net Income = Revenues − Expenses. Net income is often called the earnings of the company. When expenses exceed revenues, the business has a net loss.
| Metro Courier Inc. | ||
| Income Statement | ||
| Month Ended January 31, 20XX | ||
| Revenue: | ||
| Service Revenue | $60,000 | |
| Total Revenues | $60,000 | |
| Expenses: | ||
| Salary Expense | $900 | |
| Utility Expense | $1,200 | |
| Total Expenses | $2,100 | |
| Net Income ($60,000 – $2,100) | $57,900 | |
The net income from the income statement will be used in the statement of owner’s equity, also called statement of retained earnings.