Ask Me Help Desk - Doing my head in - balance sheet/income statement

Every time I think I've made a step forward, I read something that makes me scrap everything I started. I can not for the life of me figure this out, and as someone who has zero experience in this (and who doesn't pay enough attention in class), I'm in urgent need of assistance.

PART A

Using the information provided below you are required to:

a) Prepare an income statement for the year ended June 30, 2009. Clearly show both gross profit & net profit
b) Prepare a balance sheet as at June 30 2009

Accounts Balance($)

Advertising 1,800 - guess that goes into accounts receivable - asset
Cash at Bank 5,700 - asset
Commission Received 1,200 - asset
Cost of Sales 28,400 - liab
Creditors 7,000 - asset
Debtors 9,300 - liab
Depreciation shop Fittings 2,400 - liab
GST Payable 1,300 - liab
Interest Expense 90 - liab
Land & Building - 120,000 - asset
Mortgage Loan from Bank 80,000 -liab
Advertising Expense 1,000 - liab
Salaries & Wages Expense 12,000 - liab
Sales - 54,000 - asset
Shop Fittings – 25,500 - asset
Stock - 15,500 - asset
Shareholders Equity ?????? - I assume that this is found out once we have the other stuff in place..

Is any of that right?

PART B

From the following information you are required to

a) Complete a cash flow statement for the month ending Sepetember 30, 2009

ABC Pty Ltd
Cash Summaries for the month ending September 30, 2009

Cash Sales 640,000
Debtors 135,000
Capital Contribution 550,000
Creditors 325,000
Operating Expenses 135,000
GST Payable 2,500
Commission Received 8,500
Proceeds of Loan Bank 950,000
Drawings 18,000
Loan Repayments Principle 500,000
Purchase of Premises 1,300,000

Cash Balance 1/9/2009 85,000

This one I don't even know where to begin.

ANY help would be stupendously appreciated. Even something to get me going. Thank you

Practically no one in a college accounting course has had it before, so they're all in the same boat. It obviously would help if you paid attention in class -- it's bad enough for most people when they do, let alone when you don't.

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Is any of that right?

Oh, well, a little... OK, first off, I'm not quite sure what was given in the problem since you're mixing your own comments in there. Was this list given with the account names and dollar amounts exactly as is? I don't mean the "liab" and all that off to the right. Just the list of accounts and the numbers, like you have it? And then you were to take that and make an income statement?

First, you need to re-organize it by account type. I see you've attempted to do that. However... first issue is that you've tried to fit everything into the accounting equation and have not include revenues and expenses. An income statement is revenues and expenses, so you'll never get an income statement that way.

Also, the way you have classified some things tells me that you don't understand what these categories of accounts are at all. Only five of them are correct.

So we're going to define all the classifications:
Assets: Stuff the company owns or has a claim to. "Owns" is generally easier to understand cause that's stuff like cash, supplies, land, buildings, equipment, etc. Pretty much if it's a tangible item, it's an asset. Things they have a claim to are a little more difficult. But that is stuff like accounts receivable and prepaid expenses -- that's because they have something coming to them. Accounts receivable represents what others owe to the company, so that's like "future cash." (I am wondering why you think advertising expense is accounts receivable. First, it's advertising expense - you can't change the account name. Second, it's not something someone owes you.)

Liabilities: What the company owes or has an obligation to. All "payable" accounts are liabilities, because they imply that cash is due in the future. So those are a given. Obligations can be a little tougher. That's things like unearned revenue, when someone has paid you in advance and you still "owe them" work. (i.e. you have an obligation)

Equity: Net worth. Equity isn't a "thing." It's basically assets owned less the liabilities owed. For a corporation, it consists of capital stock, which is the owner's investment, and retained earnings, which is the net income less dividends each year, and whatever isn't paid in dividends keeps accumulating in that account. Earnings retained in the company, hence, retained earnings.

Revenue: What the company earns. This is the thing the company is in business to do. (What does this company do "for a living"?)

Expenses: When someone else does a service for the company or provides them something, and also the using up of an asset. (That last one meaning things like used up supplies becomes an asset.) Easy one: if it says expense on it, it is. Most expenses say so, but a few don't, like cost of goods sold.

You need to go back and re-categorize these. The five you got right: Cash, GST Payable, Mortgage, Shop Fittings. That's four, hmm. Ah, Land & Building.

Two things are questionable: what is "commissions received"? "Received" is a description of something that happens. Can I assume that means Commission Revenues? Check that one. (You already have sales so I don't get it.) Also, stock. Well, there's stock like inventory. In the U.S. we call it inventory as an account name. There's also capital stock, as in the owner investment. So I'm not sure what this is supposed to be.

Unless I know what those two accounts are, I'd prefer not commenting on the questionable stockholder equity at the bottom. I'm not sure if that was listed that way or you wrote it in. That isn't an account but rather a total of a section. You can always find equity by finding a missing number, since it has to balance, but not if I'm unsure of a couple of accounts.

Give this another crack. If you can get more of them right, then I'll be willing to give away the rest, with explanation. It might help to know why you think some are what they are, to get an idea of your mind set.

The income statement is your revenues less expenses. You should have an example in your book.

As for the cash flow - you're not in the U.S. so I'm not sure which kind you're doing. There's a kind I don't know how to do, so I'd prefer not touching it. And the way the information is presented is not familiar to me, but I'm not quite sure what they're doing there.

First off your response is great morgaine, much appreciated.

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OK, first off, I'm not quite sure what was given in the problem since you're mixing your own comments in there. Was this list given with the account names and dollar amounts exactly as is? I don't mean the "liab" and all that off to the right. Just the list of accounts and the numbers, like you have it? And then you were to take that and make an income statement?

Yeah it was just the list and the figures next to it. The liab/asset stuff was what I put in. And we had to take that and turn it into an income statement, and then form a balance sheet. The liab/asset stuff I wrote down was mainly in relation to the balance sheet; what I can't figure out is what goes into an income statement (from what I gather, not everything is included in it)

This is the income statement that I originally tried to do (but wasn't confident in):

XYZ
Income statement
For the year ended 30 June

20X1 20X2
Sales (all credit) 54,000
Less: Cost of goods sold 28,400
Gross profit 25,596
Operating expenses 13,000
Net profit before interest and tax 12,596
Net profit before tax 12,506
Tax 1,300
Net profit after tax 11,206

Probably should have posted that in my original post. Once again though, I'm not sure if I've missed the key figures, or whether I've included some which shouldn't be in there.

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(I am wondering why you think advertising expense is accounts receivable. First, it's advertising expense - you can't change the account name. Second, it's not something someone owes you.)

I was confused by this, but I made my judgement based on something I found in our prescribed textbook. In the figures, we are given both "Advertising" and "Advertising expense". Firstly I figures they are different for a reason. But I found an example somewhere which placed Advertising in account receivable. Even though it doesn't really make sense - how does a company make money on advertising? But it still doesn't explain why both Advertising and advertising expense are in there. Advertising expense as far as I can tell is the money the company is forking out for advertising. So it was more a process of deduction than anything else.

You need to go back and re-categorize these. The five you got right: Cash, GST Payable, Mortgage, Shop Fittings. That's four, hmm. Ah, Land & Building.

Here's another shot at it:

Advertising 1,800 - mentioned that above. I still think this goes into the companys account.
Cash at Bank 5,700 - asset
Commission Received 1,200 - Reason behind this is everything that fits under "Received" is money coming into the company. So I put it down as revenue/asset.
Cost of Sales 28,400 - Expense
Creditors 7,000 - accounts receivable, so should be an asset.
Debtors 9,300 - liab/expense
Depreciation shop Fittings 2,400 - Would this figure just be deducted from Shop Fittings? And then just leave the shop fittings as is?
GST Payable 1,300 - liab
Interest Expense 90 - Expense
Land & Building - 120,000 - asset
Mortgage Loan from Bank 80,000 -liab
Advertising Expense 1,000 - Expense
Salaries & Wages Expense 12,000 - Expense
Sales - 54,000 - Revenue (which in turn is an asset)
Shop Fittings – 25,500 - asset
Stock - 15,500 - Yeah stock refers to inventory. So that should be a company asset
Shareholders Equity ?? - According to my little table up top, should end up equaling to $11,206 or something.

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Two things are questionable: what is "commissions received"? "Received" is a description of something that happens. Can I assume that means Commission Revenues? Check that one. (You already have sales so I don't get it.)

Im pretty sure it would be revenues. Ill double check when I get the opportunity, but I think we're meant to assume that is is.

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Also, stock. Well, there's stock like inventory. In the U.S. we call it inventory as an account name. There's also capital stock, as in the owner investment. So I'm not sure what this is supposed to be.

Yep, definitely inventory, was a little unsure myself but got that checked out.

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Give this another crack. If you can get more of them right, then I'll be willing to give away the rest, with explanation. It might help to know why you think some are what they are, to get an idea of your mind set.

Thanks for that explanation, greatly appreciated. Not sure if I made any headway with my response, look forward to your feedback.

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First off your response is great morgaine, much appreciated.

No problem. Still confused over some stuff so can't give you definitive answers, but I can explain some more stuff.

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The liab/asset stuff I wrote down was mainly in relation to the balance sheet; what I can't figure out is what goes into an income statement (from what I gather, not everything is included in it)

The problem with that is that you made everything a balance sheet account, which they are not. But we need to address part of the problem in a bit...

The income statement is mostly right, except you want to actually list the interest expense in there. The problem is that since we have some questionable accounts, I don't know if there should be anything else in there. But there's definitely nothing incorrect about what you have thus far.

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I was confused by this, but I made my judgement based on something I found in our prescribed textbook. In the figures, we are given both "Advertising" and "Advertising expense".

I just now noticed that when I went to enter this into Excel to see how things were balancing. I agree they must both be listed for a reason. However, I don't see any way at all that advertising would be a receivable.

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Even though it doesn't really make sense - how does a company make money on advertising?

A company can easily make money off advertising, if that's what they do for their business. In fact, I worked for a place that put out a periodical that made 95% of its revenues from selling advertising. That isn't the issue.

The issue is that receivables represents an amount someone owes to you. Even if you did get revenues from advertising, the revenue is a separate account, only what someone still owes you would go into receivables. The two numbers would not match, because customers will also be paying you along the way. The amount in receivables at year-end represents what is still owed to you on that date. So it's not the same thing as the revenue itself.

In addition to advertising expense, you can also have advertising revenue, and could also have prepaid advertising. (You can prepay darn near anything.) You could even have Unearned Advertising Revenue! If it was still due to you, it would be in receivables, but it's not normal to separate out a receivable for individual everyday revenues. (We do separate out things like Interest Receivable.) So if they think that's Advertising Receivable, I don't know why. It doesn't have the word receivable on it.

This is exactly why it is so imperative to put words like expense, revenue, payable, etc on things. Because otherwise we don't know what kind of account it is. Notice I hit an advertising account covering asset, liability, revenue and expense. Those words are very important. Whoever put this problem together should know that!

Back to your list. If I don't mention it, it's correct.

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Creditors 7,000 - accounts receivable, so should be an asset.
Debtors 9,300 - liab/expense

Backwards. These are called receivables and payables in the U.S.. We don't generally use the term debtors for the receivables. But creditors are people we owe. Granted, I don't know some of the other countries' terms for everything, but as far as I've been able to tell, creditors are still creditors, and "debtors" are receivables. You may want to check up on that.

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Depreciation shop Fittings 2,400 - Would this figure just be deducted from Shop Fittings? And then just leave the shop fittings as is?

Well, there's some confusion on this one. (I've found confusion on more stuff since I posted last. Isn't that nice to know?) I originally took this to mean accumulated depreciation, but it could be an expense. Since it doesn't have either word on it, it's hard to tell. If it's accumulated depreciation, yes, it's deducted from the shop fittings. You should list both numbers on the B/S - the cost of the fittings, then the depreciation as a negative to that. The difference is book value.

I'm having difficulty with the fact that regardless of which it is, the other is missing. i.e. why do we have accumulated depreciation without an expense? Or why do we have an expense without an accumulated account? And why do we not have any depreciation for the building? Maybe other countries don't depreciate buildings. Never much understood why you'd depreciate a building anyway. ;)

All in all, someone did a poor job with this problem.

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Commission Received 1,200 - Reason behind this is everything that fits under "Received" is money coming into the company. So I put it down as revenue/asset.

Received probably does mean money coming into the company, but money and revenues aren't the same thing. (We have to straighten that misconception out.) Revenues are what you earn, whether you receive the money at the same time or not. That's why receivables exist -- for when someone doesn't pay you immediately when you've earned. You have sales, so I don't understand why there's also commissions. The sales are going into sales. A real estate company would receive commissions. If you're selling your own inventory, then that's sales, not commissions. It seems more logical to pay someone else commissions for selling the stuff. Can't say I get it. I'm probably being "too logical" again. :p

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Sales - 54,000 - Revenue (which in turn is an asset)

It's revenue, but that does not make it "in turn" an asset. You absolutely must get this cleared up or it's going to keep screwing you up. Assets are things the company owns, resources they have. Revenue isn't a "thing." It's not a resource. They don't own it. And it's absolutely not cash. You think of your paycheck as revenue. It's not. It's something you have received of value in exchange for the revenue you earned.

If I come over and mow your lawn, I'm earning. The money you give me isn't the earnings. The mowing is the earnings - the work I'm doing for you. If you can't pay me until next week, then I still record the earnings because I still earned it. And then stick it into a receivable cause that represents what you owe me. Then next week you give me the money, and I get my cash and reduce it off the receivable -- at that time, there's no more earnings, cause I already recorded that.

So revenues aren't assets. They're revenues. You have five kinds of accounts, as I listed before. Revenues and assets are two different categories - something can't belong to both.

Same deal with expenses, except that's your side of the lawn mowing. And you still had the expense even if you didn't pay me yet, cause you got the benefit of the mowing. I noticed you had some expenses as liabilities the first time around. Liabilities represent what you owe to others. The expense and the liability are two different things. Even if you don't pay for it and you owe it, the expense represents the lawn mowing, and the liability represents how much you owe. (The explanation on receivables applies here too, except you owe others.)

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Shareholders Equity ?? - According to my little table up top, should end up equaling to $11,206 or something.

Can you get an exact number? I might be able to at least figure out whether the questionable ones are debits or credits if I have that.

OK, that's it for now. I'll just have to wait until you respond on some of that because for the moment I don't know how to go any further.

Don't know where you are, but it's late here. I don't know if I'll be back tonight or not. But I'm usually around at some point, or maybe one of the ones from some other countries can straighten some of this up.