Accounting for Managers

Financial Statements
61
Shareholder Equity
Preferred Stock
200,000
Common Stock
1,190,000
Paid-in Capital
420,000
Retained Earnings
100,000
Total Liabilities and Shareholder Equity
5,177,400
Total Equity
1,910,000
Figure 3-5. Balance sheet (continued)
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maintained on a cash basis, set up an accounts receivable and
accounts payable balance.
Accounting for Managers
62
Ledger Account
Date
Dec 31
Account
Ref
Debit
Credit
Prepaid insurance
$600
Dec 31
Balance
$3,600
$3,000
Ledger Account
Date
Account
Ref
Debit
Credit
Insurance expense
Dec 31
Balance
$3,600
$600
Dec 31
$4,200
Table 3-7. Insurance: ledger accounts
Date
Account
Ref
Debit
Credit
Prepaid insurance
$7,200
Cash
$7,200
Annual insurance bill
June 1
General Ledger
Ledger Account
Date
June 30
Account
Ref
Debit
Credit
Prepaid insurance
$7,200
$600
June 1
Prepaid insurance
Balance
$7,200
$6,600
Ledger Account
Date
Account
Ref
Debit
Credit
Insurance expense
$600
June 30
Balance
$600
Table 3-6. Insurance: general journal and ledger accounts
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Manager’s Checklist for Chapter 3
❏
There are many forms for business entities. These forms
principally relate to legal and tax concerns, although each
has slightly different accounting requirements. 
❏
The accounting cycle outlines a series of steps that should
be followed to conform to GAAP. These procedures aim to
reduce errors and improve the accuracy of financial state-
ments.
❏
Financial statements are historical documents useful to
many groups of users, both internal and external to the
company. The financial statements help show the prof-
itability and solvency of the company.
❏
The income statement shows how much money the com-
pany made.
❏
The statement of cash flows shows how the company used
the money it made.
❏
The balance sheet shows how much is left of what the
company made. 
❏
Adjusting statements clarify and account for transactions
that span accounting periods.
Financial Statements
63
Ledger Account
Date
Jan 31
Account
Ref
Debit
Credit
Prepaid insurance
$600
Jan 1
Balance
$3,000
$2,400
Ledger Account
Date
Account
Ref
Debit
Credit
Insurance expense
Dec 31
Balance
$600
Dec 31
$600
Table 3-8. Insurance: ledger accounts
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64
4
F
aced with the columns and rows of numbers in financial
statements, a manager could become discouraged at the
task of wresting meaning from such material. Outside of the
readily apparent “top line” and “bottom line,” what information
can be gained from financial statements? Worlds. The informa-
tion in a balance sheet and an income statement can give your
management activities structure, direction, and meaning.