Reference no: EM13830370

Associate Level Material

Appendix

Statement of Earnings

How often have you added up all your monthly expenses and compared the sum against how much you make? If you have done this you have created a statement of net earnings, much like a human resources company. Let's take this a step further. Rather than adding up all your expenses, try sorting them into categories. Find and list the total amount you spent on rent, utilities, food, gas and car payments, for example. Now make a list of these five items and others on a sheet of paper. This personal income statement might be very similar to the statement of activities found on p. 23 of the text.

If your expenses are greater than your revenues, or pay, then you must either reduce expenses or increase cash receipts, or both. If the trend in an organization's income statement shows continued losses, action must be taken or the organization will run out of money and the operation will have to close. The income statement, or statement of earnings, tells you how well the organization is managing its resources.

Balance Sheet for an Organization

The balance sheet gives you a snapshot of the organization's assets and liabilities. This statement tells you where the organization is at any one point in time. The income statement, by contrast, tells you how the organization performs over a period of time.

Say you want to know how much cash the organization had at the end of an accounting period, or perhaps you are interested in learning the value of the vehicles owned by the organization. Maybe you want to know how much money the organization owes. All of this information is included on the balance sheet.

Creating a Personal Balance Sheet

How would you put together your own balance sheet? First, you would identify the value of all the assets you own. These can include your car, house, furniture, computer, and prized T-shirt from the New York Marathon. Then identify all your liabilities, including credit card balances, mortgage balances, and car loan balances. Notice that you would not add the amounts paid on the credit cards (payments go on the income statement) but only the outstanding balances. By comparing assets and liabilities, you can determine if you have a positive net worth or if you are headed to bankruptcy court.

If you look at the balance sheet of an organization or your personal balance sheet, you can see whether there are more assets than liabilities. If an organization/personal balance sheet has more assets than liabilities, they are said to have a positive net worth. If the organization/personal balance sheet has more liabilities than assets, they are said to have a negative net worth. This is determined by this basic accounting formula: Net Worth = Assets - Liabilities, but remember this a balance statement so Total Liabilities and Net Worth must equal Total Assets. There are consequences for organizations or individuals in a negative net worth position, including higher interest rates on loans and possible bankruptcy.