This comprehensive journal entry for the asset and liability effects of making profit “speaks” to an accountant, who’s familiar with journal entries and debits and credits. Translate this journal entry into plain English, giving an explanation that non-accounting business managers, lenders, and investors can understand.
The effects from sales and expenses for the year just ended for a business were as follows:
Sales revenue was $15,700,000; the business collected $13,900,000 cash from customers, and accounts receivable increased $1,800,000. The cost of products sold during the year was $9,800,000, and the business added $500,000 of products to inventory. It didn’t pay for all $10,300,000 in purchases. Its accounts payable for inventory purchases increased $250,000. Selling and general expenses were $4,860,000. The business added $125,000 to its prepaid expenses balance during the year. It recorded a $145,000 depreciation expense for the year. (Depreciation is included in the selling and general expenses amount reported in its income statement.) Not all expenses were paid for by the end of the year; unpaid expenses caused a $150,000 increase in accounts payable and a $225,000 increase in accrued expenses payable. The business paid $200,000 interest during the year. The amount of unpaid interest at year-end increased $25,000. The business is organized legally as a limited liability company (LLC) and has elected not to pay income tax. Its taxable income for the year is passed through to its shareowners, who include their respective portions of the business’s taxable income in their individual income tax returns.
a. Prepare the annual income statement of the business in single-step form.
b. Prepare a summary journal entry for the sales and for each expense of the business for the year.
c. Prepare a comprehensive entry showing the changes in assets and liabilities from profit for the year.