Prepare Financial Statements Using the Adjusted Trial Balance - Principles of Accounting, Volume 1_

3/7/2020 Prepare Financial Statements Using the Adjusted Trial Balance - Principles of Accounting, Volume 1: Financial Accounting - OpenStax
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Once you have prepared the adjusted trial balance, you are ready to prepare the financial statements.
Preparing financial statements is the seventh step in the accounting cycle. Remember that we have four
financial statements to prepare: an income statement, a statement of retained earnings, a balance sheet,
and the statement of cash flows. These financial statements were introduced in Introduction to Financial
Statements and Statement of Cash Flows dedicates in-depth discussion to that statement.
To prepare the financial statements, a company will look at the adjusted trial balance for account
information. From this information, the company will begin constructing each of the statements, beginning
with the income statement. Income statements will include all revenue and expense accounts. The
statement of retained earnings will include beginning retained earnings, any net income (loss) (found on
the income statement), and dividends. The balance sheet is going to include assets, contra assets,
liabilities, and stockholder equity accounts, including ending retained earnings and common stock.
YOUR TURN
Magnificent Adjusted Trial Balance
Go over the adjusted trial balance for Magnificent Landscaping Service. Identify which financial
statement each account will go on: Balance Sheet, Statement of Retained Earnings, or Income
Statement.
Solution
Balance Sheet: Cash, accounts receivable, office supplied, prepaid insurance, equipment,
accumulated depreciation (equipment), accounts payable, salaries payable, unearned lawn
mowing revenue, and common stock. Statement of Retained Earnings: Dividends. Income
Statement: Lawn mowing revenue, gas expense, advertising expense, depreciation expense
(equipment), supplies expense, and salaries expense.
Income Statement
An income statement shows the organization’s financial performance for a given period of time. When
preparing an income statement, revenues will always come before expenses in the presentation. For
Printing Plus, the following is its January 2019 Income Statement.

3/7/2020 Prepare Financial Statements Using the Adjusted Trial Balance - Principles of Accounting, Volume 1: Financial Accounting - OpenStax
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Revenue and expense information is taken from the adjusted trial balance as follows:
Total revenues are $10,240, while total expenses are $5,575. Total expenses are subtracted from total
revenues to get a net income of $4,665. If total expenses were more than total revenues, Printing Plus

3/7/2020 Prepare Financial Statements Using the Adjusted Trial Balance - Principles of Accounting, Volume 1: Financial Accounting - OpenStax