Within an accounting cycle,explain how income statement,changes in owners equity and balance sheet are prepared ??

Expert Solution

A part of owners’ equity is retained earnings. Income statement provides net income after subtracting recurring expenses from the net revenues amount. Net income of each cycle is added to retained earnings and from there the amount of dividend to shareholders (if any) is subtracted. The rest amount of retained earnings is added to the amount of contributed capital and changes the owners’ equity from the previous cycle. Once there is a change in owners’ equity the total amount of balance sheet is also changed.

Formulas are as below:

In case of income statement: Net income = Revenues – Expenses

Retained earnings (ending) = Retained earnings (beginning) + Net income during the current cycle – Dividend during the current cycle.

Owners’ equity = Contributed capital (till date) + Retained earnings (ending)

In case of balance sheet: Assets = Liabilities + Owners’ equity

ekkarill92 answered 2 years ago

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