In this lesson, I am going to explain how to balance the accounts of your general ledger, and I will also explain how to create an Income Statement for your household or business.
An income statement is an important accounting document. It allows you to calculate the profit or loss of your business (or household). In order to create an Income Statement, you will need to complete your General Ledger accounts for the accounting period. The accounting period is the time frame of your accounting documents. I usually create an Income Statement at the end of the month that contains all the incomes and expenses of the past month, and I also create an Income Statement for the entire financial year.
This is the seventh lesson in my basic bookkeeping course. Please note that the $ sign used below represents money and is not a symbol of any specific currency.
Balancing the Ledger Accounts
We are going to continue with our example of Johnson Mechanics. Please familiarize yourself with the General Ledger below:
Just with the information above we can figure out a few things about the business, we can:
- Figure out how much money the business has in the bank.
- Figure out the balances / totals of each account.
- Calculate the profit/loss the business made
- Determine the owner’s equity.
Calculate how much money is in the bank from a ledger account.
In order to determine how much money the business has in the bank account, we will need to balance the Bank Account in the General Ledger. The word Balance is the difference between the total debit amounts and the total credit amounts. We calculate the balance of the Bank Account by following these steps:
- Add together all the debits in the Bank Account to get the Total Receipts.
- Add together all the credits in the Bank Account to get the Total Payments.
- Take the larger amount and write it in as the Total on both the Debit Side and the Credit side.
- Calculate the difference between the Total and the smaller amount, fill it in between the two numbers with the words “Balance C/D”. C/D stands for Carry Down.
- Write the amount on the opposite side with the words “Balance B/D”. This is the amount of money you should have in your bank account.
If the Balance B/D is on the Debit Side then you have a positive bank balance. If the Balance B/D is on the Credit Side then you have a negative bank balance.
Here is the balanced bank account of Johnson Mechanics:
Total the other accounts
Because the other accounts of Johnson Mechanics only have debit or credit transactions in them (not both), it is much easier to balance these accounts. All you have to do is add the amounts on either the debit side or the credit side and get the total. See the example below:
Creating an Income Statement
An income statement is used to calculate the profit (or loss) of the business. Profit is the amount of income that is more than the expenses of the financial period. A loss is the amount of income less than the expenses of the financial period.
It makes logical sense that the income statement will contain all the Income Accounts from the General Ledger and all the Expense Accounts from the General Ledger.
Using our Example of Johnson Mechanics, we will use the Rent Expense account and the Current Income account to make the Income Statement below:
Here is an example of our household income statement for one month:
Finally, using the Income Statement, we can figure out the change in the Owner’s Equity. It is simple enough, you will take the Capital Contribution and add the profit to it (or subtract the loss from it). For Johnson Mechanics, the Owner’s Equity was $70,000 and he has made a $2,500 profit. Therefore, the Owner’s Equity is now $72,500.
This can be confirmed by adding the balances of all the Assets together: $42,500 (Cash) + $20,000 (Equipment) + $10,000 (Vehicles) = $72,500
Conclusion and Tasks:
In conclusion, you should now be able to balance the accounts in your general ledger, and you should be able to create an Income Statement for your household or business. I recommend creating an income statement at the end of each month, or as often as you need to get the big picture of what your household income and expenses look like. In the next article I will be talking about how to handle creditors (people you owe money) in your bookkeeping documents.
- At the end of the month, balance your general ledger.
- At the end of the month, create your household/business income statement.
- Feel free to draft an income statement at any time during the month to get an idea of what is happening in your household/business books.