Accounting for Accruals
4.6. Financial statements for the third illustration of accrual accounting
All four financial statements for 20X8 are presented below.
Illustration 25: Income statement for Candely Services for 20X8
Candely Services |
|
|
|
Interest Revenue |
$20 |
Interest Expense |
(200) |
Net Loss |
(180) |
Note that the "bottom" line is now called Net Loss because the company had a loss in 20X8.
One new element in 20X8 income statement is Interest Expense. Interest expense represents the amount Candely Services accrued in 20X8 for using money borrowed from the bank. Note that no cash payment for the interest expense was made in 20X8. Therefore, the ending Interest Payable balance (see the balance sheet below) is $200.
Illustration 26: Statement of changes in equity for Candely Services for 20X8
Candely
Services |
|
|
|
Beginning Contributed Capital |
$ 3,500 |
Ending Contributed Capital |
3,500 |
|
|
Beginning Retained Earnings |
$ 2,140 |
Plus: Net Income |
(180) |
Less: Distribution |
(1,000) |
Ending Retained Earnings |
960 |
|
|
Total Equity |
$ 4,460 |
In the statement of changes in equity note that Candely Services has a net loss amounting to $180.
Illustration 27: Balance sheet for Candely Services at 20X8 end
Candely Services |
|
Assets |
|
Cash |
$ 2,260 |
Accounts Receivable |
500 |
Interest Receivable |
0 |
Certification of Deposit |
0 |
Land |
5,000 |
Total Assets |
7,760 |
|
|
Liabilities |
|
Salaries Payable |
700 |
Interest Payable |
200 |
Note Payable |
2,400 |
Total Liabilities |
3,300 |
|
|
Equity |
|
Contributed Capital |
3,500 |
Retained Earnings |
960 |
Total Equity |
4,460 |
|
|
Total Liability and Equity (Claims) |
7,760 |
The liabilities section of the balance sheet includes Interest Payable and Note Payable, new elements introduced in 20X8. Both terms were explained earlier in this tutorial. Note that total assets equal total claims (liabilities and equity).
Illustration 28: Statement of cash flows for Candely Services for 20X8
Candely
Services |
|
Cash Flows from Operating Activities |
|
Cash Receipts from Interest Revenue |
$ 60 |
Net Cash Flow from Operating Activities |
60 |
|
|
Cash Flows from Investing Activities |
|
Cash Receipt from CD Maturity |
1,000 |
Cash Payment to Purchase Land |
(5,000) |
Net Cash Flow from Investing Activities |
(4,000) |
|
|
Cash Flows from Financing Activities |
|
Cash Receipt from Borrowing |
2,400 |
Cash Payments for Distributions |
(1,000) |
Net Cash Flow from Financing Activities |
1,400 |
|
|
Net Increase in Cash |
(2,540) |
Plus: Beginning Cash Balance |
4,800 |
|
|
Ending Cash Balance |
$2,260 |
In the statement of cash flows there are a few new elements. Those elements are as follows:
- cash receipts from interest revenue (part of this revenue was recognized in 20X7; however, the cash for the whole interest amount was collected in 20X8);
- cash payment for land purchase (in the investing activities section); and
- cash receipt from borrowed money (represents a financing activity).
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