☆Relationship between a statement of financial position and a statement of income

●The balance sheets are not isolated statements, they are linked over time with the income statement

●As the business records a profit in the income statement, that profit is added to

the capital section of the balance sheet, along with any capital introduced. Cash

taken out of the business by the proprietor, called drawings, is deducted.

Illustration – the accounting equation:

The transactions:

Day 1 Avon commences business introduction $1,000 cash.

Day 2 Buys a motor car for $400 cash.

Day 3 Buys inventory for $200 cash.

Day 4 Sells all the goods bought on Day 3 for $300 cash.

Day 5 Buys inventory for $400 on credit.

SFP at the end of each day’s transactions:

Solution:

Day 1 Assets (Cash $1,000) = Capital ($1,000) + Liabilities ($0)

Day 2 Assets (Motor $400) = Capital ($1,000) + Liabilities ($0)

(Cash $600)

Day 3 Assets ( Inventory $200) = Capital($1,000) + Liabilities ($0)

(Motor $400)

(Cash $400)

Day 4 Assets ( Motor$ 400) = Capital　　　　 +　 Liabilities ($0)

(Cash $700) (Beginning$1,000)

(Profit $100)

Day 5 Assets (Inventory $ 400) = Capital　　 +　 Liabilities

( Motor$ 400)　 (Beginning$1,000)($400)

(Cash $700) 　　　(Profit $100)

Avon

Statement of Financial Position as at end of Day 5

Example:

Continuing from the illustration above, prepare the SFP at the end of each day after accounting for the transactions below:

Day 6 Sells half of the goods bought on Day 5 on credit for $250.

Day 7 Pays $200 to his supplier.

Day 8 Receives $100 from a customer.

Day 9 Proprietor draws $75 in cash.

Day 10 Pays rent of $40 in cash.

Day 11 Receives a loan of $600 repayable in two years.

Day 12 Pays cash of $30 for insurance.

Your starting point is the SFP at the end of Day 5, from the illustration above.

Prepare: SFP at the end of Day 12

I.S. for the first 12 days of trading.

Solution:

Day 6 Assets (Inventory $ 200) = Capital　　　 + 　Liabilities

( Motor$ 400) 　　(Beginning$1,000)($400)

(Cash $700) 　　　　　(Profit $150)

(A/Receivable$250)

Day 7 Assets (Inventory $ 200) = Capital 　　　+　 Liabilities

( Motor$ 400)　　 (Beginning$1,000)($200)

(Cash $500) 　　　　　(Profit $150)

(A/Receivable$250)

Day 8 Assets (Inventory $ 200) = Capital　　　 + 　Liabilities

( Motor$ 400)　　 (Beginning$1,000)($200)

(Cash $600) 　　　　　(Profit $150)

(A/Receivable$150)

Day 9 Assets (Inventory $ 200) = Capital　　　 +　 Liabilities

( Motor$ 400) 　　(Beginning$1,000)($200)

(Cash $525) 　　　　　(Profit $150)

(A/Receivable$150)　 (Drawing $75)

Day 10 Assets (Inventory $ 200) = Capital　　 +　 Liabilities

( Motor$ 400)　　 (Beginning$1,000)($200)

(Cash $485) 　　　　　(Profit $110)

(A/Receivable$150)　 (Drawing $75)

Day 11 Assets (Inventory $ 200) = Capital 　　+　 Liabilities

( Motor$ 400) 　(Beginning$1,000)($200)

(Cash $1,085) 　　　(Profit $110) ($600)

(A/Receivable$150) (Drawing $75)

Day 12 Assets (Inventory $ 200) = Capital　　 +　 Liabilities

( Motor$ 400)　 (Beginning$1,000)($200)

(Cash $1,055) 　　　(Profit $80 ) ($600)

(A/Receivable$150)　(Drawing $75)

Avon

Statement of Financial Position as at end of Day 12

Avon

Income statement for the period ended at Day 12