Chapter 4 Study Sheet AC101

Preparing the Income Statement

1. Every figure on the formal statement is on the worksheet. Figure 4.13 on page 122 shows where each of these figures goes on the income statement. 2. No debit or credit columns appear on the formal statement. 3. The inside column on financial statements is used for subtotaling. 4. Withdrawals do not go on the income statement; they go on the statement of owner's equity.

Worksheet

A columnar device used by accountants to aid them in completing the accounting cycle-often just referred to as "spreadsheet." It is not a formal report.

Note how _____ ______ and ______ aid in calculating the new figure for _______.

Net Income; Withdrawals; Capital

Depreciation per month

This is found by taking the depreciation per year and / by 12

Original cost of equipment

This is not reduced; it stays the same until the equipment is sold or removed.

Accumulated Depreciation

A contra-asset account that summarizes or accumulates the amount of depreciation that has been taken on an asset. Also called the "running total" account.

Accrued salaries payable chart

Accounts Affected are office salaries expense and salaries payable; Category Expense and Liability, Increase and Increase, Rules Dr. (will go on income statement) Cr. (will go on balance sheet)

Accumulated Depreciation is a contra-asset account found on the balance sheet next to its related equipment account.

Accumulated depreciation increases with a credit.

Calculation of depreciation per year

Cost of Equipment - Residual Value / Estimated Years of Usefulness = Depreciation per Year

Book value

Cost of equipment less accumulated depreciation.

Residual value

Estimated value of an asset after all the allowable depreciation has been taken.

Net income

If you don't show the additional expense of supplies used, the company's net income will be too high. (Adjusting)

Preparing the Statement of Owner's Equity

It is important to remember that if additional investments were made, the figure on the worksheet for Capital would not be the beginning figure for Capital in the Statement of Owner's Equity. Checking the ledger account for Capital will tell you whether the amount is correct.

Depreciation Expense goes on the income statement

Results in an increase in total expenses, a decrease in net income, and, therefore, less to be paid in taxes.

Accrued salaries payable

Salaries that are earned by employees but unpaid and unrecorded during the period (and thus need to be recorded by an adjustment) and will not come due for payment, until the next accounting period.

The Income Statement Section

Step 1: Total the debits and credits. Step 2: Calculate the difference between the debit and credit columns and place the difference on the smaller side. Step 3: Total the columns.

Historical cost

The actual cost of an asset at time of purchase.

Depreciation

The allocation (spreading) of the cost of an asset (such as an auto or equipment) over its expected useful life.

Adjusting

The process of calculating the latest up-to-date balance of each account at the end of an accounting period.

Worksheet (order)

Trial Balance sheet, Adjustments sheet, Adjusted Trial Balance sheet, Income Statement, Balance Sheet

Prepaid rent

When rent is paid in advance, it is considered an asset

As the _______ _________ increases (as a credit), the equipment's ________ ________ decreases.

accumulated depreciation; book value

Each Month the amount in the Accumulated Depreciation account _______ _________ while the ______ of the equipment remains the same.

grows larger; cost