ACCOUNTING 2

CHAPTER 2.2

FINANCIAL STATEMENTS

• The Income Statement• The Statement of Retained Earnings• The Balance Sheet

INCOME STATEMENT

1. Revenue2. Cost of Merchandise Sold3. Gross Profit on Sales4. Operating Expenses5. Net Income

REVENUE

Net sales = Sales – Sales Discounts– Sales Returns and AllowancesNet Sales

COST OF MERCHANDISE SOLD

Beginning Merchandise Inventory+Net Purchases*=Cost of Merchandise Available for Sale-Ending Merchandise Inventory =Cost of Merchandise Sold

* Purchases+Transportation In=Cost of Delivered Merchandise-Purchase Discounts-Purchase returns and

Allowances=Net Purchases

GROSS PROFIT ON SALES

Net Sales-Cost of Merchandise Sold=Gross Profit On Sales

OPERATING EXPENSES

• List all Expenses in order except Federal Corporate Tax

NET INCOME

Gross Profit on Sales-Total Operating Expenses=Operating Income-Federal Corporate Income Taxes=Net Income

STATEMENT OF RETAINED EARNINGS

• Must be completed before Balance Sheet after Income Statement• Increased by net income• Decreased by net loss • Decreased by distribution of earnings to stock holders• Beginning Retained Earnings and net income from the worksheet• Ending Retained Earnings goes on balance sheet

BALANCE SHEET

• A report of the accounting equation

• Assets, Liabilities and Capital Stock come from the worksheet

• Retained Earnings come from the Statement of Retained Earnings

CLOSING ENTRIES

• Close all temporary accounts to the Income Summary Account

• Information comes from the Income Statement

CLOSING ENTRIES

• Close Expenses to Income Summary

• Close Income Summary to Retained Earnings

POSTING CLOSING ENTRIES

POST-CLOSING TRIAL BALANCE

• Shows Balances in permanent accounts only• Proves

debits and credits equal• Ensures

temp accounts are closed