- [Instructor] The trial balance contains all
of our accounts, those accounts contain the results
of all of our transactions.
The trial balance contains all of our revenue
and expense accounts, those will go on the income statement
and it contains our asset accounts,
our liability accounts and our owner's equity accounts.
Those will go on the balance sheet.
From the data in the trial balance,
an income statement can be prepared.
The income statement shows our revenues
less our expenses.
In this case, Double K had revenues
of $3,200 and total expenses
of $2,300 giving us a reported net income of $900.
Well, as you can see, an income statement
in and of itself is not hard to prepare.
You simply pull the relevant accounts
from the trial balance.
The hard part as we now know
is analyzing transactions.
Deciding which accounts are involved,
whether those accounts increased or decreased
and by how much.
The ease of preparing an income statement
is your reward for the hard work put in
to carefully making and posting journal entries.
Now a balance sheet can also be prepared
for Double K Corporation.
Notice that there is no retained earnings account
in the trial balance
but there is one on the balance sheet.
There reason for this
is that all the income statement accounts
such as revenues, cost of goods sold
and expenses are eventually accumulated
under retained earnings.
Of the earnings reflected on the income statement,
the business then decides the amount of those earnings
to be retained.
Those earnings that are to be retained
are disclosed on the balance sheet
in retained earnings.
Now a word of caution.
Individuals frequently mistake a trial balance
and the balance sheet for one another.
In fact they're very different reports.
A trial balance is strictly
an internal document used
to summarize all of the account balances
in a company's accounting system.
Few people outside a company's accounting department
ever see the trial balance.
The balance sheet on the other hand
is a more formal summary document
that is frequently provided
to interested parties both inside
and outside the company.
Well, what about statement of cash flows?
Where does that come from?
The statement of cash flows can be prepared
by categorizing the items
in a cash account as operating, investing
or financing as shown here.
The inflows and outflows of cash
are grouped into the three categories
or operating activities, things that happen every day,
investing activities, transactions
that affect the productive capacity of a business
and financing activities,
activities that involve debt and capital stock.
Now is real life harder than this?
Is this systematic method
of analyzing/recording transactions
actually what's done in the real world?
Yep.
You may not believe it
but you now know something
that a lot of people don't know.
You are becoming fluent in the language of business.
You are starting to understand debits and credits.
You can analyze transactions
and see how they would be quantified into a journal entry.
You know how those transactions get put
into the accounting system with journal entries.
You know that those journal entries
are then posted to the various accounts.
You know that the financial statements
are constructed from the numbers found
in those accounts.
You know where the numbers
on the financial statements come from.
It turns out that you now know things
most people don't know.
Congratulations.
Your market value has gone up.
Job very well done.