okay so we’re making really good
progress here this is the final part of our exercise it is time to use the
t-accounts that we created earlier in order to create a balance sheet and an
income statement the first thing we need to do is calculate the total for each of
the accounts that we have let’s draw a line below each of the accounts and
calculate the sum of its left and right columns you for the cash account we would have the
following three thousand plus twelve hundred plus
twenty seven hundred on the left side and 1,000 plus 250 plus 150 plus 900
plus 200 on the right side the sum of the left side is 6900 while the sum of
the right side is 2500 in order to obtain the final balance of the account
we need to take the difference between the two sides the same goes for the two
accounts below you the balance of the PP&E account is 900 while the one of the raw materials is
equal to 100 on the right side are all liabilities
and equity however there is one slight difference when we calculate their
balance we need to subtract in the opposite direction
so for example when I calculate the balance of trade payables I will take
the difference between 250 which is on the right and a hypothetical value which
could have been on the left side the balance of trade payables is 250 and
equity is 3000 okay let’s write on the top of our balance sheet the date that
it refers to this is the balance sheet of the company as of the 20th of August
2015 now we have to organize the names of the
accounts within our balance sheet let’s type the names of the three asset
accounts we have cash P P and D and raw materials
on the right side we have only two items trade payables and equity now we need
the balance of each of these accounts we can transfer it from the other sheet
through the equal sign that helps us create links in Excel okay here we go here are all of our balance sheet
accounts let’s create a total row at the bottom of the balance sheet this will
allow us to calculate the sum of the two columns
I’ll color it in dark blue because it is my favorite color and will change its
font color to white okay great here we will have total
assets and here we will have total liabilities
and equity now we are ready to make the sum of the
two columns something is not correct the accounting
equation is not satisfied as assets are not equal to liabilities and equity I’m
sure you know where the mistake is right we need to calculate net income in order
to balance the balance sheet given that net income is part of equity
right now an important part of equity is missing and this is the reason why the
balance sheet does not balance first of all let’s calculate the balance
of the P&L accounts that we have you when we calculate the balance of income
we do it by subtracting the right from the left column while when we do it for costs we need to
subtract in the opposite direction all right here we are we’ve calculated
the balance for each of the income statement accounts the income statement
is a straightforward presentation of a company’s revenues costs and net profit
for the time period that it covers the top line shows a company’s revenues the next line usually subtracts cost of
goods sold the sum of revenues and cost of goods
sold gives us gross profit a figure that allows us to understand what the margin
of sales was below we need to subtract other costs such as utility expenses and
DNA if we assume that the firm does not have
to pay taxes we would arrive at net income okay very well let’s include the figures
that we have in our tea accounts for the sake of clarity we will include revenues
with a positive sign and costs with a negative sign that is why I’ll have to place a
negative sign in front of costs this makes things much easier as at all times
we know that the number we are dealing with is a cost after all the numbers are in place and
we subtract costs from revenues we would obtain the net income that was generated
by the business throughout the period under consideration
this is the economic value that the firm produced for its owners as we already
know net income is part of equity every year the income that the firm produces
feeds its equity account due to the fact that income belongs to the company’s
ownership in this case it is positive and will increase the company’s equity
let’s add the net income result to the equity account in our balance sheet as you can see the two sides are now
balanced net income was the missing piece which allowed us to satisfy the
accounting equation this shows that we have worked correctly when making
entries perfect the income statement and balance sheet that we created in this
exercise are rather short because the example that we considered is very
simple despite that this is a complete exercise I am sure that at this point
you’ve learned all the important mechanics in bookkeeping and drafting of
financial statements there is a lot more to be learned but this is already a very
solid foundation congratulations for completing this exercise