We-Sell Realty Income Statement August 31, 2014 Sales commissions ................................................ $140,000 Expenses: Office salaries expense........................................... $87,000 Rent expense.................................................... 18,000 Automobile expense............................................. 7,500 Miscellaneous expense........................................... 2,200 Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,150 total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,850 Net income ....................................................... $ 25,000
Omar Farah Statement of Owner’s Equity August 31, 2013 Omar Farah, capital, August 1, 2014.......................................... $ 0 Less withdrawals during August............................................. 10,000 $(10,000) Investment on August 1, 2014............................................... 15,000 $ 5,000 Net income for August...................................................... 25,000 Omar Farah, capital, August 31, 2014 ........................................ $ 30,000
Balance Sheet For the Month Ended August 31, 2014 Assets Liabilities Cash ............................. $ 8,900 Accounts receivable ..................... $38,600 Accounts payable ................. 22,350 Supplies................................ 4,000 Owner’s Equity Omar Farah, capital...................... 30,000 total assets ....................... $31,250 total liabilities and owner’s equity........ $72,600
Answer:
1. All financial statements should contain the name of the business in their heading. The statement of owner’s equity is incorrectly headed as “Omar Farah” rather than We-Sell Realty. The heading of the balance sheet needs the name of the business.
2. The income statement and statement of owner’s equity cover a period of time and should be labeled “For the Month Ended August 31, 2014.”
3. The year in the heading for the statement of owner’s equity should be 2014 rather than 2013.
4. The balance sheet should be labeled “August 31, 2014,” rather than “For the Month Ended August 31, 2014.”
5. In the income statement, the miscellaneous expense amount should be listed as the last expense.
6. In the income statement, the total expenses are incorrectly subtracted from the sales commissions, resulting in an incorrect net income amount. The correct net income should be $24,150. This also affects the statement of owner’s equity and the amount of Omar Farah, Capital, that appears on the balance sheet.
7. In the statement of owner’s equity, the additional investment should be added first to Omar Farah, capital, as of August 1, 2014. The net income should be presented next, followed by the amount of withdrawals, which is subtracted from the net income to yield a net increase in owner’s equity.
8. Accounts payable should be listed as a liability on the balance sheet.
9. Accounts receivable and supplies should be listed as assets on the balance sheet.
10. The balance sheet assets should equal the sum of the liabilities and owner’s equity.
Corrected financial statements appear as follows:
WE-SELL REALTY Income Statement For the Month Ended August 31, 2014 Sales commissions $140,000 Expenses: Office salaries expense $87,000 Rent expense 18,000 Automobile expense 7,500 Supplies expense 1,150 Miscellaneous expense 2,200 Total expenses 115,850 Net income $ 24,150 WE-SELL REALTY Statement of Owner’s Equity For the Month Ended August 31, 2014 Omar Farah, capital, August 1, 2014 $ 0 Investment on August 1, 2014 $15,000 Net income for August 24,150 $39,150 Less withdrawals during August 10,000 Increase in owner’s equity 29,150 Omar Farah, capital, August 31, 2014 $29,150 WE-SELL REALTY Balance Sheet August 31, 2014 Assets Liabilities Cash $ 8,900 Accounts payable $22,350 Accounts receivable 38,600 Supplies 4,000 Owner’s Equity Omar Farah, capital 29,150 Total liabilities and Total assets $51,500 owner’s equity $51,500