Answer:
Susan Thompson
<em> Income Statement </em>
<em> For the Month Ending October 31, 20x6.</em>
Income $ $
Billings 18,300
Less:Operating Expenses
Salaries 8,700
Advertising 2,500
Postage 1,800
Utilities 100
Interest 450
Miscellaneous <u> 200</u> <u>(13,750)</u>
Profit Before Tax 4550
Tax <u> ( 150)</u>
Profit After Tax <u> 4400</u>
Susan Thompson
Statement of Owner`s Equity
<em> For the Month Ending October 31, 20x6</em>
$
Equity at the beginning (October 1st, 20x6) 30,000
Profit During the year <u> 4,400</u>
Subtotal 34,400
Drawings (5,500)
Equity at the End( October 31, 20x6) <u> 28,900</u>
Susan Thompson
Balance Sheet
As at October 31, 20x6
$ $
Asset
Non-current
Van 16,000
Office Equipment 4,000
Decorator Furnishing <u> 17,000 </u>
37,000
Current Asset
Cash 10,600
Debtors <u>4,100 </u>
<u> 14,700</u>
Total Asset <u> 51,700</u>
<u />
Financed by
Equity 28,900
Current Liabilities
Owing Furniture Expenditure 2,100
Accrued Advertising Expenses <u> 700</u> 2800
Non-Current Liability
Bank Loan <u>20,000</u>
Total Equity & Liabilities <u> 51,700</u>
Explanation:
When a sole proprietor is starting a new business, the opening capital for the business has to be recorded.
Here, Susan Thompson is starting the business with $50,000 cash, 60% of which was her own investment and the remaining 40% as bank loan. The accounting entries are as follow:
(Debit) Cash $50,000
(Credit) Owner`s Equity (60% of $50,000) $30,000
(Credit) Bank Loan (40% of $50,000) $20,000
After this, the transactions during the month has to be recorded in the ledger and later transfer to trial balance.
Acquisition of assets:
(Debit) Van $16,000
(Debit) Office Equipment $4,000
(Debit) Decorator Furnishing $17,000
(Credit) Cash ($16,000+$4,000+$17,000-$2100) $34,900
(Credit) Owning- Decorator Furnishing $2,100
Business transactions during the year:
(Credit) Billings $18,300
(Debit) Cash-Amount remitted by clients $14,200
(Debit) Debtors ($18,300-$14,200) $4,100
(Debit) Salaries $8,700
(Debit) Advertising $2,500
(Debit) Taxes $150
(Debit) Postage $1,800
(Debit) Utilities $100
(Debit) Interest $450
(Debit) Miscellaneous $200
(Debit) Drawing $5,500
(Credit) Cash $18,700
(Credit) Accrued Advertising Expenses $700
After this, the balances in the ledger has to be extracted to the trial balance where the figure will be used for preparation of income statement, statement of owner`s equity and balance sheet.
Trial Balance Dr($) Cr($)
Owner`s Equity 30,000
Bank Loan 20,000
Cash ($50,000+$14,200-$34,900-$18,700) 10,600
Van 16,000
Office Equipment 4,000
Decorator Furnishing 17,000
Owing-Decorator Furnishing 2,100
Billings 18,300
Debtors 4,100
Salaries 8,700
Advertising 2,500
Taxes 150
Postage 1,800
Utilities 100
Interest 450
Miscellaneous 200
Drawing 5,500
Accrued Advertising Expenses ______ <u> 700</u>
<u>71,100 </u> <u> 71,100</u>
Preparation of Accounts
Income Statement
After the extraction of the trial balance, the income statement is prepared.
In this question, <em>cost of good sold is not determined as the entity is a service business</em>. So the profit is equal to income -operating expenses.
Also,the depreciation rate is not given, so no depreciation is required to be calculated as such the opening value of the assets equals their closing value at the end of the month. In a case where depreciation rate is given, the depreciation will be charged against the individual value and the depreciation amount taken to income statement.
Statement of owner`s equity.
The owner`s equity at the end of the period equals opening equity + profit after tax for the year - drawings from the business.
Opening equity (60% of $50,000) + Profit for the year ($4,400) - drawing( 5500) =$28,900.
Balance Sheet
The balances of assets and liabilities from the trial balance prepared is taken to balance sheet, with inclusion of owner`s equity at the end of the period.
