OLIVEROS COLLEGE (OCI) INCORPORATED

Zone 2 Gov. Crescini St., San Franciso, Iriga City

SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

Entrepreneurship – Grade 12
Quarter 1 – Module 7:

Prepare an Income Statements

And a Balance Sheet
Introduction

This module is designed to help you think and develop ideas about entrepreneurship. There
are times when you will feel confused, and there are times when it will be necessary to work
on an idea over a period of several days. You will encounter many interesting and
challenging entrepreneurial in this module.

Objectives:
 Identify business firms.
 Show the line-by-line explanation of preparing income statements.
 Prepare a balance sheet and income statement.

Vocabulary List:

 business firms - usually prepare; the others being the balance sheet and
statement of cash flows.
 Income Statements - This statement should serve to give you the basic
layout and an idea of how a profit/loss statement.
 Financial Statement - refer to additional information provided in a company’s
financial statements.

Getting Ready:

Entry Card

True or False

_______ 1. Sales: Revenue generated from the sale of goods and services.

_______ 2. Cost of Goods Sold: Including labor costs only.

_______ 3. Current Liabilities: Debts owed within a year, including rent, utilities,

taxes and payroll.

_______ 4. Earnings Before Tax: Your business’s pre-tax income.

 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

_______ 5. Shareholder Equity: A business’s net assets, including money generated

by the business and donated capital.

Starting Point:
Sample balance sheet and income statement, small businesses can better understand
the relationship between the two reports. Every time a company records a sale or an
expense for bookkeeping purposes, both the balance sheet and the income statement are
affected by the transaction. The balance sheet and the income statement are two of the
three major financial statements that small businesses prepare to report on their financial
performance, along with the cash flow statement.

These topics will show you the connection between financial statements and offer a sample
balance sheet and income statement for small business:

What Goes on an Income Statement vs. Balance Sheet?

The income statement and the balance sheet report on different accounting metrics related
to a business’s financial position. By getting to know the purpose of each of the reports you
can better understand how they differ from one another.

WHAT GOES ON AN INCOME STATEMENT?

An income statement, also called a profit and loss statement, lists a business’s revenues,
expenses and overall profit or loss for a specific period of time. An income statement reports
the following line items:

 Sales: Revenue generated from the sale of goods and services

 Cost of Goods Sold: Including labor and material costs

 Gross Profit: The cost of goods sold subtracted from sales

 General and Administrative Expenses: Includes rent, utilities, salary, etc.

 Earnings Before Tax: Your business’s pre-tax income

 Net Income: The total revenue minus total expenses, which gives the profit or loss

The end goal of the income statement is to show a business’s net income for a specific
reporting period. If the net income is a positive number, the business reports a profit. If it’s a
negative number, the business reports a loss.
 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

WHAT GOES ON A BALANCE SHEET?

A balance sheet reports a business’s assets, liabilities and equity at a specific point in time.
A balance sheet is broken into two main sections: assets on one side and liabilities and
equity on the other side. The two sides must balance out, meaning they should be equal to
one another. It reports the following line items:

 Current Assets: Assets that will be converted to cash within a year, including accounts
receivable, inventory and prepaid expenses

 Long-Term Assets: Assets that won’t be converted to cash within a year, including land,
buildings and equipment

 Current Liabilities: Debts owed within a year, including rent, utilities, taxes and payroll

 Long-Term Liabilities: Long-term business loans, pension fund liabilities

 Shareholders Equity: A business’s net assets, including money generated by the business
and donated capital

The balance sheet tells you what your business owns and what it owes to others on a
specific date. It gives a snapshot of the business’s overall worth.

How Do You Prepare a Balance Sheet from an Income Statement?

A business’s financial statements are all interconnected and they report some of the same
information, but for different purposes. Because some of your financial statements draw from
data reported on other statements, there’s a particular order you should follow when
preparing them, which is:

1. Income Statement
2. Balance Sheet
3. Cash Flow Statement

To prepare a balance sheet, you need to calculate net income. Net income is the final
calculation included on the income statement, showing how much profit or loss the business
generated during the reporting period. Once you’ve prepared your income statement, you
can use the net income figure to start creating your balance sheet.

On the balance sheet, net income appears in the retained earnings line item. Net income
affects how much equity a business reports on the balance sheet.

THE RELATIONSHIP BETWEEN INCOME STATEMENT AND BALANCE SHEET

In double-entry bookkeeping, the income statement and balance sheet are closely
related. Double-entry bookkeeping involves making two separate entries for every business
 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

transaction recorded. One of these entries appears on the income statement and the other
appears on the balance sheet.

Every time a sale or expense is recorded, affecting the income statement, the assets or
liabilities are affected on the balance sheet. When a business records a sale, its assets will
increase or its liabilities will decrease. When a business records an expense, its assets will
decrease or its liabilities will increase. In this way, the income statement and balance sheet
are closely related. Dummies.com put together this helpful illustration demonstrating just
how closely the two reports tie together:

The Difference Between an Income Statement and Balance Sheet

The income statement and balance sheet report different financial accounting information
about your business. The key differences between the two reports include:

Line Items Reported: The income statement reports revenue, expenses and profit or loss,
while the balance sheet reports assets, liabilities and shareholder equity.

Timing: The income statement reports on financial performance for a specific time range,
often a month, quarter or year. The balance sheet reports on financial activity for one
specific date.
 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

Metrics: The line items on the income statement are compared to the sales figure to find
your company’s gross margin, operating income and net income, as percentages. The line
items on the balance sheet can be used to understand the liquidity of your business.

Sample Income Statement

This sample income statement from Accounting Coach shows the different figures used to
calculate net income, the layout of the report and how it differs from a balance sheet:

Sample Balance Sheet

 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

This sample balance sheet from Accounting Coach shows the line items reported, the layout
of the document and how it differs from an income statement:
 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

The income statement shows the profitability of the firm over a period of time. Set your
income statement up by first choosing a time frame, such as the current month, quarter or
full year's worth of accumulated financial results. 

The income statement table below is presented with a line-by-line explanation so you can
look at the profit or loss after deducting each expense.

Line 1 shows the gross revenue or sales figure. It equates to the total amount of sales in
dollars that the firm has made for the given income statement period. If your firm sold 40,000
widgets at $25 each, you would show $1,000,000 on the sales line. You would show the
amount sold, even if you've billed your customers but haven't yet collected the money.

Line 2 has a $500,000 entry for cost of goods sold. This cost covers the purchase of units of
your product for sale. Cost of goods sold is often a firm's largest expense. Cost of goods
sold contains all costs directly related to producing your product, such as direct labor, and
purchases of raw materials.

If you buy goods wholesale and then resell them, you would also reflect that on this line. For
example, 40,000 widgets purchased at a wholesale cost of $12.50 each equals $500,000
cost of goods sold during the period reflected on this income statement.

Line 3: Subtract the cost of goods sold from gross sales to get gross profit (Line 3). 

Line 4: From the $500,000 gross profit, subtract selling and administration (S,G&A)
expenses. This $250,000 item represents your office expenses, such as costs not directly
related to producing goods for sale. If you have several related expenses, such as
telephone, electric and water bills, you can group them into one line called "utilities."

S,G&A expenses also include costs like wages, sales commissions, office rent, and legal
and accounting fees.

Line 5 shows the company's depreciation expense. When you buy a building or equipment
for your business, you depreciate it over a period of time. Depreciation is a non-cash
expense and serves as a tax shelter, so it is shown on the income statement.

Line 6: After subtracting selling and administrative expenses and depreciation, you arrive at
the operating profit. Operating profit is also called earnings before interest and taxes (EBIT),
which in this case totals $170,000.

Line 7: After you calculate EBIT, add your company's interest expense. Interest is what you
pay on any debt your company owes. To calculate the interest on the debt, you have to
know the interest rate you are paying and multiply it by the principal amount of your debt. For
this example, the interest amount is assumed at $30,000 and goes on Line 7.
 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

Line 8: After subtracting your interest expense from EBIT, you arrive at earnings before
taxes on Line 8.

Line 9: Fill in the amount you pay in federal, state, local, and payroll taxes on Line 9. The tax
rate, in this example, is 21 percent. 

Line 10: After you subtract the tax expense, you'll arrive at the earnings available to your
common shareholders, which is stated on Line 10.

Line 11: If you have investors in your firm or if you take a salary from your firm, Line 11 is
where you record the draw or the dividends.

Line 12 Subtract all of the expenses above from line 3, gross profit, to calculate your
company's net income (profit). This represents the money you have left to put back, or
reinvest, into the firm in the form of retained earnings.

Transfer this net income amount to your balance sheet at the end of your accounting period,
to the retained earnings account. Aside from being reinvested in the company, this amount
might also be used to pay future dividends.

The table below shows an example of a very simplified income statement. The income
statement of your company may be a little more complex and contain more line items. This
statement should serve to give you the basic layout and an idea of how a profit/loss
statement, or income statement, works.

XYZ Company Income Statement For the Year Ending Dec. 31, 2018

1. Sales $1,000,000
2. Cost of Goods Sold $500,000
3. Gross Profit $500,000
4. Selling & Administrative Expense $250,000
5. Depreciation $80,000
6. Operating Profit (EBIT) $170,000
7. Interest $30,000
8. Earnings Before Taxes (EBT) $140,000
9. Taxes (21%) $29,400
10. Earnings Available to Common Shareholders $110,600
11. Dividends or Owner Draw $20,000
12. Net Income $90,600

Additionally, verify that repeating transactions get recorded in the same general ledger
accounts each time so that when you compare income statement line items from one period
to the next, you feel comfortable knowing you're comparing apples to apples.A company's
income statement is only as accurate as the quality of its data. It makes sense to review your
 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

accounting transactions at a detailed level, especially if one of the line items on your income
statement seems unusually large or small.

Practice your skills:

Test 1: Identify the following statement.
_________ 1. refer to additional information provided in a company’s financial
statements.

_________ 2. Includes rent, utilities, salary, etc.

_________ 3. Assets that won’t be converted to cash within a year, including

land, buildings and equipment.

_________ 4. Assets that will be converted to cash within a year, including

accounts receivable, inventory and prepaid expenses.

_________ 5. This represents the money you have left to put back, or
reinvest, into the firm in the form.

Test 2: Make your own example of company balance sheet. (Investment only).

Current Assets

Cash

Pretty Cash

Temporary Investment

Account receivable-net

Inventory

Supplies

Prepaid Insurance

Total current Assets

Investment

Test 3: Make your own example of company balance sheet. (Liabilities only).
 OLIVEROS COLLEGE (OCI) INCORPORATED
Zone 2 Gov. Crescini St., San Franciso, Iriga City
SENIOR HIGH SCHOOL DEPARTMENT
e-mail address: oci_iriga@yahoo.com.ph
Tel. No. 299 – 7734

Current liabilities
Notes payable
Accounts payable
Wages payable
Intertest payable
Taxes payable
Warranty liability
Unearned revenues
Total current liabilities
Long-term liabilities
Notes payable
Bonds payable
Total long-term liabilities
Total Liabilities

Developing skills:
Draw and write the example of balance sheet.

Bibliography:
Dr. Eduardo A. Morato, Jr. 2016. Entrepreneurship