The entire process of accounting for transactions and preparing financial statements is known as the accounting cycle .
This process is repeated each accounting period .
Some companies prepare monthly financial statements and complete this cycle each month ; other companies prepare quarterly financial statements; and some companies prepare only annual financial statements.
ABC Company’s trial balance (pre-closing) at the end of January, Year 1:
ABC Company January 31, Year 1 Trial Balance Account Debit Credit Cash 14,500 Inventory 2,000 Note payable 5,000 Paid-in capital 10,000 Retained earnings 0 Sales revenue 7,500 Cost-of-goods-sold expense 6,000 0 Total 22,500 22,500 Note that total debits ($22,500) = total credits ($22,500). Note also that Retained earnings has a balance of zero because the revenue and expense accounts have not yet been closed to retained earnings.
Prepare Income Statement and Retained Earnings Statement
ABC Company’s financial statements for the month of January, Year 1 are shown below.
Retained Earnings Statement
ABC Company Income Statement For the period January 1–31, Year 1 Sales revenue $7,500 Cost of goods sold expense 6,000 Income $1,500 ABC Company Retained Earnings Statement For the period January 1–31, Year 1 Retained earnings, January 1 $ 0 Income, January 1,500 Dividends, January 0 Retained earnings, January 31 $1,500
ABC Company Balance Sheet January 31, Year 1 Assets Liabilities and Equity Cash $14,500 Note payable $ 5,000 Inventory 2,000 Total liabilities 5,000 Total assets $16,500 Paid-in capital 10,000 Retained earnings 1,500 Total liab & equity $16,500
ABC Company Statement of Cash Flows For the period January 1-31, Year 1 Operating Activities Cash collected from customers $ 7,500 Cash paid to suppliers (8,000 ) Net cash flow from operating activities (500 ) Investing Activities Purchases of long-term assets 0 Net cash flow from operating activities 0 Financing Activities Increase in paid-in capital 10,000 Increase in long-term debt (note payable) 5,000 Net cash flow from financing activities 15,000 Net change in cash during the period 14,500 Cash balance, January 1 0 Cash balance, January 31 $14,500