After your business’s accounts successfully pass a trial balance test (with debits and credits that equal), you can then begin developing a financial statement worksheet, as well as the financial statements, including balance sheets and income statements.
The first step in producing the financial statements is using the information from the trial balance to develop a worksheet that includes the initial trial balance, the accounts that would be shown on a balance sheet, and finally the accounts that would normally be shown on an income statement.
You create the worksheet that includes these seven columns:
Column 1: Account list
Columns 2 and 3: Trial balance (one column for debits, one column for credits)
Columns 4 and 5: Balance sheet (one column for debits, one column for credits)
Columns 6 and 7: Income statement (one column for debits, one column for credits)
In the figure below, you see a sample of a worksheet developed from trial balance numbers. Note that the numbers of the trial balance are transferred to the appropriate financial statement; for example, the Cash account, which is an asset, is shown in the debit column of the balance sheet.
After you transfer all the accounts to their appropriate balance sheet or income statement columns, you total the worksheet columns. Don’t panic when you see that the totals at the bottom of your columns aren’t equal — it’s because the net income hasn’t been calculated yet.
The difference between the debits and credits in both the balance sheet and the income statement totals should be the same. That amount should represent the net income that will appear on the income statement.
In the figure, the $4,500 difference for the balance sheet is shown as a credit, representing an increase in Retained Earnings. The Retained Earnings account reflects the profits that have been reinvested into the company’s assets in order to grow the company.
In some incorporated companies, part of the earnings are taken out in the form of dividends paid to stockholders. Dividends are a portion of the earnings divided up among stockholders. The board of directors of the corporation set a certain amount per share to be paid to stockholders.
Many other small companies that haven’t incorporated pay out earnings to their owners using a Drawing account, which tracks any cash taken out by the owners. Each owner should have his or her own Drawing account so that you have a history of how much each owner withdraws from the company’s resources.