Income statement and balance sheet

How to prepare Income statement and balance sheet ?

In this topic we will explain how to prepare income statement and balance sheet with the help of trial balance data. so first important thing is to give you idea that what are income statement and balance sheet definition?
1. Income statement : There are longest and complicated definition of income statement but in my  words " income statement is statement which indicate the profit or loss of company through subtracting expenses from Revenue. "  so don't get confuse with complicated definition  this definition of income statement really define  full procedure of income statement.

2. Balance sheet : we can say that " balance sheet is statement which indicate or show the financial position of company " or in other words balance sheet is combination of assets = owner's equity + liabilities. It means that how much company purchase fixed and current asset and how much its owner equity ( investment made by owner ) + liabilities ( amount which is borrowed ). So  this was balance sheet definition in simple words.

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So another part of this topic is that how you prepare Income statement with help of  Adjusted trial balance. In definition I explain so it is Revenue less expense. When Revenue account comes in trial balance post this into income statement. E.g fees earned  or revenue earned etc.  In preparing income statement first write a company name , than income statement and in last write date. For example

              business education 

               Income statement 

   For the year ended on 31

After that write revenue earned by a firm and subtract expenses from Revenue earned. You got the end result which is the net income of company. Now you see in the example data you will be able to prepare financial statement.

This is adjusted trial balance of Hempstead Reality  which prepared according to them march 31st 2001 Items those are listed in this trial balance are Cash , Account Receivable , office supplies , land , building , and we have depreciation on building and equipment , equipment , Account payable , capital , drawing , commission earned  , Adv expense , Auto mobile expense , salaries expense , Telephone expense , dep: expense on building and equipment and last office supplies  and last we have total (173200) which is equal in both side. With this we are going to prepare income statement.

Write same name on top of statement and change only the middle sentence with income statement. Like this

                    HEMPSTEAD REALITY

                        Income statement

                    Year ended on march 31 2001

  Revenue

Commission earned           Rs.20000

Less expenses :
 Adv expense                900
Automobile expenses  500
Salaries expense        7000
Telephone expense     600
Depreciation expense  600
Office supplies.             350.   9950
                                     _____     _____
Net income.                            10050

First we write commission earned  under revenue heading and than subtracted all expenses from Revenue and finally we got net income this is  all how you can prepare income statement.
Income statement is prepared at the end of accounting period. Accounting period  is that time of company in which accounting books are prepared. It consists of 12 month. Income statement is also known as list of  Revenue and expenses. This type of statement is very help full for a company to check his past performance and through past performance get  the basis for future performance.

Our next part of this topic is Balance sheet. Balance sheet is the main statement for every company it is a combination of assets equal to liabilities  plus owner equity  . in assets side we put  current asset and fixed asset. Current asset means those assets which can be converted into cash in shortest period of time e.g one year while fixed are those assets that can not be converted into cash in shortest period these are property of company.  Liabilities are the company's debts or the borrowed amount. So if in balance sheet liabilities are higher then owner equity it means that company is in negative position. If liabilities are  low as compared to equity then company is in positive position. Another thing is owner equity. It is  investment of owner in company. In sole proprietorship it is called owner equity while in corporation its called stockholder equity.

In balance sheet we seen that assets and owner equity plus  liabilities have same total. So it indicate that Hampstead Reality firm's financial position is in balance. Another thing I want to share that balance sheet have to forms 1st have two side in one side assets and other side liabilities and equities are written it is called horizontal form and 2nd  form have only one side   top we write assets and down liabilities and equities it is called report form. In world this form is used in every company so my suggestion to you use and practice balance sheet on only report form.


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You can also find how you can prepare journal , ledger and trial balance these are necessary for preparing income statement and balance sheet on my blog