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INCOME STATEMENT

An income statement is a one-page financial

statement which summarizes the profitability of the business entity It has two major components 1, Revenue 2,Expenses Result of income statement will be net profit or loss of the business activity.

INCOME STATEMET (service industry)

basic format
Revenue

50,000

Less: Expenses

Rent expense 4000 Salaries expense 5000 Utilities expense 6000 total expense Net income

15,000 35,000

Class activity
Service revenue

Rent expense
Salaries expense Repair and maintenance expense

Office supplies expense


Telephone bill expense Electricity expense Find net income or loss

Rs.65,000 4500 8000 2500 2000 2500 3000

BALANCE SHEET
The balance sheet lists the amounts of the

companys assets, liabilities, and owners equity at the end of the accounting period. The balances of assets, liabilities and owners equity are taken from trial balance.

Class activity
Cash

Rs.3000 supplies Rs.450 Land Rs.5000 A/c receivable Rs.500 Office equipment Rs.6000 A/c payable Rs.7500 Note payable Rs.1500 Capital Rs.5950
Prepare Balance sheet
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BALANCE SHEET
Cash A/c receivable Supplies 3000 500 450 A/c Payable Note payable Owners equity Capital 7500 1500

Land Office equipment

5000 6000 14950

5950 14950

ACCOUNTING EQUATION
ASSETS = LIABILITIES +OWNERS QUITY ASSETS --- LIABILITIES = OWNERS EQUITY

DEPRECIATION
Equipment, furniture are purchased and use

in business over the years. Each year value of these assets decline because of their use. Usage of these assets are recorded as depreciation. What journal entry is required?
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JOURNAL ENTRY OF DEPRECAITON


Depreciation expense (debit) xxxx

Accumulated depreciation (credit) ( to record depreciation )

xxx

Example: Company purchased computer for Rs.45000 and expected useful life is 5 years.
What is annual depreciation?
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Computation of depreciation
Cost/ life of asset Annual depreciation: 45,000/5 = Rs. 9000 What is adjusting entry?

Dr Cr Dep. Expense(equipment) 9000 Accumulated dep.(equipment) 9000


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Effect on Income statement AND Balance sheet


Depreciation expense is recorded as expense

in INCOME STATEMENT
ACCUMULATED DEPRECIATION is

deducted from cost of asset in Balance sheet


Equipment

45000 Less: accumulated depreciation 9000 36,000


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Class activity
Attempt MEIGHS AND MEIGHS

Page no. 147 Q No. 3A-4

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INCOME STATEMENT for the year ended Dec.31,1994 Admission revenue Less: expense Advertising expense 15,000 Rent expense 36,000 Repairs expense 5200 Salaries expense 79000 Light and power expense 4500 Depreciation expense-building 6000 Depreciation-golf 15000 Net Income

192,000

160700 31300
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BALANCE SHEET
Cash A/c receivable Supplies 3000 500 450 A/c Payable Note payable Owners equity Capital 7500 1500

Land Office equipment

5000 6000 14950

5950 14950

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Class activity
Cash received from customer Rs.200 What is Journal entry?

Cash (debit) 200 A/c Receivable(credit)

200

What would be its effect on Balance

sheet??????
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GENERAL LEDGER
CASH Op Balance 3000 200

3200
A/c Receivable Opening bal 500 200

300
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BALANCE SHEET after collection


Cash A/c receivable Supplies 3200 300 450 A/c Payable Note payable Owners equity Capital 7500 1500

Land Office equipment

5000 6000 14950

5950 14950

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INCOME STATEMENT-trading activities


Suppose you purchased merchandise for

Rs.6000 and sold for Rs.8000.


What is Gross Profit?

Gross profit = Sales cost of sales


Gross profit = 8000 6000 = 2000

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INCOME STATEMENT-trading activities( continue)


Suppose you have opening stock in store

worth Rs.500 and you purchase goods for Rs.6000. Now whole stock sold for Rs.8000.
What is Gross profit ???????
Sales Less: cost of sales

8000

Op.stock

500 Purchase 6000 Gross profit

6500 1500

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INCOME STATEMENT-trading activities( continue)


Suppose you had opening stock Rs.5000 and

you bought goods Rs.25000. Total sales for the period is Rs. 43,000. Closing stock in store is Rs. 7000. What is cost of goods sold?????? What is Gross profit????????

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Activity solution
COST OF GOODS SOLD

Opening stock + purchases ending stock

= Cost of goods sold

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COST OF GOODS SOLD


Opening stock

Purchases

Goods available for sale Less: closing stock cost of goods sold

Rs.5000 25,000 30,000 (7000) 23,000

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INCOME STATEMENT

SALES REVENUE Opening stock Rs.5000 Purchases 25,000 Goods available for sale 30,000 Less: closing stock (7000) cost of goods sold GROSS PROFIT

43,000

(23,000) 20,000

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INCOME STATEMENT-trading activities( continue)


Suppose sales revenue for the year is

Rs.56,500 and sales return Rs.600 and sales discount Rs.2000.


What is net sales????????????
Net sales = sales revenue-sales return-sales

discount
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NET SALES
SALES REVENUE

LESS: SALES RETURN

56,500 (600)
(2000)
53900

SALES DISCOUNT
NET SLAES

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INCOME STATEMENT-trading activities( continue)


Purchase of merchandise Rs. 26,000. Paid

transportation charges Rs.3000. return goods to supplier Rs.500 and availed purchases discount Rs.3200.
What is net purchases?????????

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NET PURCHASES

PURCHASES

+
TRANSPORTATION NET PURCHASES

PURCHASES RETURN

PURCHASES DISCOUNT
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NET PURCHASES
Purchases

Add: transportation

Less: Purchases return Purchases discount Net purchases

26,000 3000 (500) (3200) 25300

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ACTIVITY

Sales revenue Purchases Sales return Purchases discount Transportation Sales discount Opening stock Closing stock Find Gross profit????????????

75,600 56000 200 1000 1500 600 12000 7000

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INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31,2004

Sales revenue Less: Sales return Sales discount Net Sales Less: Cost of goods sold Opening stock purchases add: transportation less: purchases discount Less: closing stock
GROSS PROFIT

75600 (200) (600) 74800 12000 56000 1500 (1000) (7000) 61500 13300
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ACTIVITY

Sales revenue Purchases Sales return Transportation Sales discount Closing stock Opening stock

86,600 66000 1200 5500 1600 6000 8000

Find Gross profit????????????


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INCOME STATEMENT (trading activities)


Mds. Inventory-opening

Mds.Inventory-ending (credit)
Purchases, return, discount, transportation Sales revenue, return, discount All expenses Other income

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CURRENT ASSETS
Cash

A/c Receivable
Note receivable Closing stock Marketable securities Short term investment Prepaid/ unexpired / unuse Office supplies
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FIXED / NON-CURRENT ASSETS


Furniture

Less: Accumulated dep

56000 (6000) 50,000

Building, machinery, equipment, land Motor-vehicle, plant, long-term investment

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CURRENT LIABILITY
A/c Payable

Bill payable
Accrued expenses Unearned Bank overdraft Short-term loan

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FIXED / NON-CURRENT LIABILITY


Long-term loan

Bonds payable
Mortgage loan Debenture payable

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Owners equity
Capital

Add: Net profit


Less: Net loss Less: Drawing Add: Additional investment

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CLOSING ENTRIES-M&M#179
Firm close all expenses and revenue accounts at

end of financial year. Difference of expense and revenue is transferred to owners equity as profit or loss.

Sales commission earned Management fees earned

15484 420

Income summary a/c (To close the revenue accounts)

15904

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Closing entries -continue


Income summary

12570
1275

Advertising expense Salaries expense Telephone expense Insurance expense Office supplies expense Dep.expense-building Dep.expense-equipment Interest expense
To close all expenses accounts

9605 1195 50 220 150 45 30

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Closing entries -continue


Income summary

3334 James Roberts, capital 3334 (to close the Income summary account)
If drawing is given IF PROFIT

James Roberts capital 1500 James Roberts Drawing 1500


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CLOSING ENTRIES

INCOME SUMMARY ACCOUNT ( DEBIT) Mds. INVENTORY-OP PURCHASES TRANSPORTATION CREDIT SALES RETURN SALES DISCOUNT ALL EXPENSES

To close all expenses accounts


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CLOSING ENTRIES (continue)

SALES REVENUE MDS. INVENTORY-ENDING DEBIT OTHER INCOME PURCHASES RETURN PURCHASES DISCOUNT INCOME SUMMARY ACCOUNT

CREDIT

To close all credit accounts

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CLOSING ENTRIES (continue)


IN CASE OF NET PROFIT FROM COMPANY INCOME SUMMARY ACCOUNT CAPITAL ACCOUNT debit credit

To close drawing account

Capital account ------debit Drawing account --------credit


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REVERSING ENTRIES
There are four types which reversed at the

start of new year. 1. Accrued expense 2.Accrued income 3.Unearned income 4.when expense comes on credit side (unrecorded expense)

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Adjusting entry

Salaries expense 5000 Salaries payable 5000

Reversing entry

Salaries payable 5000 Salaries expense

5000
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