The document provides instructions for building financial statements, including balance sheets and income statements. It explains the key components of each statement - for the balance sheet, it is assets, liabilities, and equity, while for the income statement it is revenues and expenses. It discusses how to list accounts for each section and handle adjustments such as accumulated depreciation, doubtful debts, and cost of goods sold calculations. Finally, it outlines the typical layout for each statement, including gross profit, net profit before and after taxes sections.

1. How to Build
Financial
Statements
Income Statement (Profit and Loss) and
Balance Sheet (Position)

2. Balance Sheet
This is constructed of Assets, Liabilities and Owners
Capital (Issued Stock/Shares)
Assets (DR) = Liabilities (CR) + Owners Capital (CR)
All Assets have a DEBIT as the normal balance
All Liabilities and Owner’s capital have a CREDIT as
the normal balance
This statement tells you how much an entity is worth

3. Balance Sheet Continued
• Start building the balance sheet by listing ALL the
assets first (debit balances)
Current Assets
Cash
Temporay investments
Accounts recievable
Inventory
Supplies
Prepayments
Investments
Property Plant and
Equipment
Land
Land Improvements
Buildings
Equipment
Less Accumulated Depreciation
Intangible Assets
Goodwill
Other Assets

4. Balance Sheet Continued
• Next list all the Liabilities and Owner’s Capital (credit
balances)
Current Liabilities
Notes payable
Accounts payable
Wages payable
Interest payable
Taxes payable
Warranty liability
Unearned revenues
Long-Term
Liabilities
Long-term loans
Bonds payable
Stockholders' Equity
Common stock
Retained earnings
(less Treasury stock) - negative

5. Balance Sheet Concluded
• Remember that in the balance sheet
Assets (DR) = Liabilities (CR) + Owners Capital (CR)
So all the assets should equal the (liabilities + owners
capital)

6. Layouts for Balance
Sheets
• You can use either a columnar account or a T-
account
• Once you understand the debit and credit aspect
of the balance sheet (this includes how to increase
or decrease these balances)…either systems are
very easy

7. T-Account Balance Sheet
Debit Credit
Current Assets Current Liabilities
Cash Notes payable
Temporay investments Accounts payable
Accounts recievable Wages payable
Inventory Interest payable
Supplies Taxes payable
Prepayments Warranty liability
Unearned revenues
Investments
Property Plant and Equipment Long-Term Liabilities
Land Long-term loans
Land Improvements Bonds payable
Buildings
Equipment Stockholders' Equity
Less Accumulated Depreciation Common stock
Retained earnings
Intangible Assets (less Treasury stock) - negative
Goodwill
Other Assets

8. Columnar Balance SheetCurrent Assets Debit
Cash
Temporay investments
Accounts recievable
Inventory
Supplies
Prepayments
Investments
Property Plant and Equipment
Land
Land Improvements
Buildings
Equipment
Less Accumulated Depreciation
Intangible Assets
Goodwill
Other Assets xxxxxxxxx
Current Liabilities Credit
Notes payable
Accounts payable
Wages payable
Interest payable
Taxes payable
Warranty liability
Unearned revenues
Long-Term Liabilities
Long-term loans
Bonds payable
Stockholders' Equity
Common stock
Retained earnings
(less Treasury stock) - negative
xxxxxxxxx

9. Tricky Adjustments For
the Balance Sheet
• Accumulated depreciation of an asset (CREDIT
balance) reduces the book value of that asset
• Doubtful debts (CREDIT balance) are written off
against the Accounts Receivable balance
• Unearned revenues (CREDIT BALANCES) are treated
as liabilities to the entity
• Any warranties (CREDIT BALANCE) is treated as a
liability to the entity

10. Profit and Loss Sheet
• This is constructed of the Revenues and the
Expenditures
• All Revenues will have a CREDIT Balance
• All Expenses will have a DEBIT Balance
• Often you will have to also work out the Cost of
Goods sold
o Opening Inventory
o Purchases
o Closing Inventory
This Statement tells an entity if they are making any money

11. Profit and Loss Continued
• Begin by listing all the Revenue streams (CREDIT
Balance)
Revenue
Sales
Interest Earned
Dividends Received

12. Working out Costs of
Goods Sold
Figures that you need are
- opening inventory
- purchases
- freight
- closing inventory
Opening Inventory +
Purchases +
Freight +
Cost of Goods Available for Sale
Less Closing Inventory
Cost of Goods Sold

13. Profit and Loss Continued
• Once you have the Revenues (Credit Balance) and
you have worked out the Cost of Goods Sold (Debit
balance…because this is an expense)
Revenue CREDIT
Sales
Interest Earned
Dividends Received
Cost of Goods Sold
Opening Inventory + DEBIT
Purchases +
Freight +
Cost of Goods Available for Sale
Less Closing Inventory
Cost of Goods Sold
Gross Profit Revenue less Cost of
Goods Sold

14. Profit and Loss Continued
• Next you list all the Expenditure (Debit Balance)
• These can be listed in categories such as
administrative, selling and distribution, and general
expenses
Expenditures DEBIT
Salaries and Wages
Rent
Light, heat and power
Depreciation of assets
Repairs and maintenance
Other expenses

15. Layout of Profit and Loss
Sheet
• In the first instance you will have a GROSS PROFIT – this is
the Revenue less Costs of Goods Sold
• In the second instance you will have PROFIT FROM
OPERATIONS – this is Gross Profit less the operating
expenses
• In the third instance you may make adjustments for other
incomes or other expenses to the Profit from operations-
the result is the NET PROFIT BEFORE TAXES
• In the fourth instance you may have a provision for
income tax which you will remove from the net profit
before taxes to give you NET PROFIT AFTER INCOME TAX

16. Profit and Loss Sheet
LayoutRevenue CREDIT $$$$$$$
Cost of Goods Sold DEBIT ($$$$$$)
GROSS PROFIT $$$$$$$
Expenditures DEBIT ($$$$$$)
PROFIT FROM OPERATIONS $$$$$$$
Other Income CREDIT $$$$$$$
Other Expenses DEBIT ($$$$$$)
Net Profit
Before Taxes $$$$$$$
Provision for
Income Tax DEBIT ($$$$$$)
Net Profit After
Taxes $$$$$$$

17. Trickey Things in the
Profit and Loss Sheet
• You may not always be given the purchases – you
may have to work this out – so know the Cost of
Goods sold equation well
• Bad debts (Debit in the Profit and Loss) is NOT the
Provision for Doubtful Debts (Credit in the Balance
Sheet)
o DR Bad debt (expensed)
• CR Provision for Doubtful debts (sometimes known as the Allowance
for Doubtful Debts)
• The Provision for Doubtful debts often sits below Account Receivables
in the Balance Sheet …as a contra reducing Account Receivables
balance

18. (¯`*•.¸,¸¸,::HAPPY::ACCOUNTANTS::,¸¸,¸.•*´¯)