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In accounting, there are four parts that make up the financial statements. The four parts are as follows: Retained Earnings (RE), Income Statement (IS), Balance Sheet (BS), and Statement of Cash Flows (CF). For purposes of this article, I will explain the three main parts of the financial statements that are needed in accounting 201. The three main parts that are needed are the Income Statement, Statement of Retained Earnings, and the Balance Sheet.
In order to begin your Income Statement, you must first include the header. This usually consists of Name of Company, Income Statement, and Dates for which the Income statement is being conducted for. Example: August 31, 2010 – September 30 2010. Next, must create a column for where your “Revenue” accounts can be listed. Then go over a few columns and put “Debit” and “Credit” (each in their own column). Now, you should list all of your Revenue accounts underneath the “Revenue” column. A few examples of revenue accounts are Sales and Revenue Earned. After you have listed all of your revenue accounts, you must then insert into the debit column the amount of each account. Once that is done, you then add all of your revenue accounts to come out with total amount of revenue which is then placed in the credit column. After this is done, you must then skip a space and create a new column of accounts. These accounts will be your “Expenses”. Just as before, you must now list your expenses underneath this heading. Examples of expenses are: supplies expenses, insurance expenses, and miscellaneous expenses. Once again, you must record the amount of your expenses and place them into the correct account in the debit column. After this is done, you then add all of your expenses to come out with your total amount expenses. This number is recorded into the credit column. And now to finish your Income Statement, you take your Total Revenue subtracted from your Total Expenses. This will give you the amount of your Net Income or Total Income. If you have a positive number then you are gaining money (net profit). If you have a negative number, you are losing money (net loss).
Next, you must create your Statement of Retained Earnings. Just as before, you must include your header, which contains the Name of the Company, Statement of Retained Earnings, and the Dates for which it is being calculated. To begin, you must create a column where your Retained Earnings can be listed. Once again, go over a few columns and write “debit” and “credit” (in their own columns). Now you can begin listing your accounts under Retained Earnings. These accounts will be Retained Earnings-August 31, 2010 and Net Income (the amount from September). You must then record the amount of each account into the debit column. Once that is done, you must then add these amounts together to come out with an answer which is placed into the credit column. After you have reached an answer, you must then skip a space and write Dividends into the Retained Earnings column. You must then record the amount for Dividends into the debit column. After that is finished, you then subtract Dividends from the total amount of Retained Earnings-August and Net Income to come out with your final answer for the Retained Earnings-September 2010.
Lastly, you create the Balance Sheet. Again, you must include the header (same as the previous two). To set up the Balance Sheet, you must set it up with Assets on the left, and Liabilities and Owner’s Equity on the right (it is usually easier to have your Owner’s Equity below your Liabilities). It is also important to have a Debit and Credit column for each of these categories (Liabilities and Owner’s Equity will match up if you did the one beneath the other). Now you begin to plug your accounts to where they belong. Example: Cash goes to assets, Accounts payable goes to liability, and Retained earnings goes to owner’s equity. Once that is finished, you then plug the amount of each account into the debit column. After this, we then begin to add all of the accounts together. The asset column adds all of the assets together and subtracts the amount of depreciation used on those assets to give you the Total amount of Assets. The liabilities are added together to give you the Total amount of Liabilities, and the Owner’s Equity is added together to give you the Total amount of Owner’s Equity. Once that is done, you must then add your Total Liabilities plus your Total Owner’s Equity in order to balance the amount with your Total Assets.