Journal: How Financial Statements Inform Businesses

It's time to get your journal out again! In this section, we explored financial statements. Do the math and make comparisons in your journal for this scenario to practice understanding how financial statements inform businesses.

To earn money for college expenses, you ran a lawn-mowing business during the summer. Before heading to college at the end of August, you wanted to find out how much money you had earned that summer. Fortunately, you kept good accounting records. You charged customers a total of $5,000 for lawn mowing services (including $500 that is still owed to you by one of your biggest customers). You spent $1,000 on gasoline, lawn mower repairs, and other expenses, including a $100 lawn mower tune-up that you haven't paid for yet. You decided to prepare an income statement to see how you did. Since you couldn't decide whether to use the cash-basis or accrual method, you prepared both types of statements. What was your income under each approach? Which method (cash-basis or accrual) more accurately reflects the income you earned during the summer? Why?

If you didn't copy the journal from Section 1.1, you can use this document as your journal.