Accounting For Dummies®, 4th Edition

7.2. Figuring Out Why Financial Statements Differ

Look at the third column on the right in Figure 7-1. These are the differences between the two financial statement versions. In the balance sheet the differences are concentrated in assets; only one liability is different. In total, assets are $1.55 million lower and liabilities are $65,000 higher. These differences are the results of recording slightly lower amounts of sales revenue and significantly higher amounts of expenses in the conservative Version C scenario.

Remember the following about revenue and expenses:

• Recording sales revenue increases an asset (or decreases a liability in some cases).

• Recording an expense either decreases an asset or increases a liability.

Most of the balance sheet differences in Figure 7-1 are caused by higher amounts of expenses in the Version C scenario. The cumulative amount of net income recorded over the years by the business in the Version C scenario is $1,615,000 less than in Version A:

$1,550,000 smaller amount of assets + $65,000
  higher amount of liabilities = $1,615,000
   less net income recorded over the years

At the end of each year, the amount of annual net income is recorded in the retained earnings owners' equity account. As you can see in Figure 7-1, the retained earnings balance in Version C is exactly $1,615,000 less than in Version A. This is a sizable amount, to be sure. But keep ...