As we learned earlier. the statement of Iinancial position. or balance sheet. is a detailed expression of the accounting equation:
Assets = Llahillties + Owner’s E(I’ully
Michael McBryan started the business by depositing $80,000 in a company bank account. . .
Purchased land for $52,000, paying cash.
Purchased a building for $36,000, paying $6,000 in cash and issuing a note payable for the remaining $30,000:
Purchased tools and equipment on account, $13,800.
Sold some of the tools at a price equal to their cost, $1,800, collectible within 45 days.
Received $600 in partial collection of the iiccount receivable from the sale of tools.
Paid $6,800 in partial payment of an account payable.
Recorded $2.200 of sales revenue received in cash.
Paid $1,400 of operating expenses in cuh-$200 for utilities and $1,200 for wages
The table below shows the effects of these trnnsactions on the llCt:ountingequation. The effect of each trnnsaction is shown in red. Notice that the “balances,” shown in black, are the amounts appearing in Overnight’s balance sheets.on pages 48•.•52. Notice also that the accounting equation always remains in balance.
While this table represents the impact of Overnight’s transactions on the accounting . equation, and thus on its financ,ial position as shown in its balance sheet, we can now . see how the other two financial statements enter the picture. Specifically, the. income statement isa separate statement that shows how the statement of financial position . changed as a resutt of its revenue and expense transactions, and the statement of cash flows shows how the company’s cash went up and down during the period. In other words, the income statement is simply a separate expression of the revenue and expense portions of the far right column (Owner’s Equity), and the statement of cash Ilows is a separate expression of the entire far left column (Cash).
The income statement is a separate representation of the company’s revenue and expense transactions for the year. It is particularly important for the company’s owners, creditors, and other i.rt~rested parties to understand the income statement. Ultimately the company will succeed or fail based on its ability to earn revenue in excess of its expenses, Once the company’s assets are acquired and business commences, revenues and expenses ~e important sources of cash flows for the enterprise, Revenues are increases in the company’s assets from irs profit-directed activities, and they result in positive cash flows, Similarly, expenses are decreases in the company’s assets from its profit-directed activities, and they result in negative cash flows. Net income is the difference between the two. Should a company find itself in the undesirable situation of baving expenses greater than revenues, we call the difference a net loss. .
Overnight’s income statement for the month of November is relatively simple because the company did not have a large number of complex revenue and expense transactions.’ , Taking information directly from the Owner’s Equity column .ot the previous table, we can prepare the company’s income statement as follows
Notice that the heading ‘for the income statement refers to a period of time (a month in this case) rather than a point in time, as was the case with the balance sheet. The income statement reports on the financial performance of the company in terms of earning revenue and incurring expenses over a period of time and explains, in part, how the company’s financial position changed between the beginning and ending of that period.