2.3 Prepare an Income Statement, Statement of Owner's Equity, and Balance Sheet
Preparing Financial Statements
Now that we understand the components, let's learn how to prepare the three primary financial statements. We'll use a complete example for a Luxembourg SME.
Example: Tech Solutions SARL
Tech Solutions SARL is a small IT consulting company in Luxembourg. Here is their trial balance (we'll learn how to prepare this in Chapter 3) as of December 31, 2024:
Tech Solutions SARL
Trial Balance
December 31, 2024
Account Debit Credit
─────────────────────────────────────────────────────
Cash (510000) €25,000
Accounts Receivable (410000) 15,000
Equipment (223000) 30,000
Accounts Payable (400000) €8,000
VAT Payable (430000) 2,000
Bank Loan (120000) 20,000
Share Capital (101000) 15,000
Retained Earnings (104000) 10,000
Sales Revenue (701000) 50,000
Salaries Expense (620000) 25,000
Rent Expense (612000) 6,000
Utilities Expense (615000) 1,500
Other Expenses (619000) 2,500
─────────────────────────────────────────────────────
Totals €105,000 €105,000
Step 1: Prepare the Income Statement
The Income Statement shows revenues and expenses for the period.
Format:
- Header (Company name, statement name, period)
- Revenue section
- Expense section
- Net Income (or Net Loss)
Tech Solutions SARL Income Statement:
Income Statement
Tech Solutions SARL
For the Year Ended December 31, 2024
REVENUE
Service Revenue (701000) €50,000
EXPENSES
Salaries Expense (620000) €25,000
Rent Expense (612000) 6,000
Utilities Expense (615000) 1,500
Other Expenses (619000) 2,500
Total Expenses (35,000)
NET INCOME €15,000
Key Points:
- Revenue is listed first
- Expenses are listed and totaled
- Net Income = Revenue - Total Expenses
- PCN account numbers shown in parentheses (Luxembourg practice)
Step 2: Prepare the Statement of Owner's Equity
The Statement of Owner's Equity shows how equity changed during the period.
Format:
- Header
- Beginning Equity
- Add: Net Income (from Income Statement)
- Less: Withdrawals/Distributions
- Ending Equity
Tech Solutions SARL Statement of Owner's Equity:
Statement of Owner's Equity
Tech Solutions SARL
For the Year Ended December 31, 2024
Beginning Equity, January 1, 2024
Share Capital (101000) €15,000
Retained Earnings (104000) 10,000
Total Beginning Equity €25,000
Add: Net Income (from Income Statement) 15,000
Less: Distributions to Owners 0
Ending Equity, December 31, 2024 €40,000
Key Points:
- Beginning equity comes from previous period's ending equity
- Net Income comes from the Income Statement
- Ending equity will go to the Balance Sheet
Step 3: Prepare the Balance Sheet
The Balance Sheet shows assets, liabilities, and equity at a specific date.
Format:
- Header (Company name, statement name, date)
- Assets section (current, then noncurrent)
- Liabilities section (current, then noncurrent)
- Equity section
- Total Liabilities and Equity (must equal Total Assets)
Tech Solutions SARL Balance Sheet:
Balance Sheet
Tech Solutions SARL
As of December 31, 2024
ASSETS
Current Assets:
Cash (510000) €25,000
Accounts Receivable (410000) 15,000
Total Current Assets €40,000
Noncurrent Assets:
Equipment (223000) 30,000
Total Noncurrent Assets 30,000
TOTAL ASSETS €70,000
LIABILITIES
Current Liabilities:
Accounts Payable (400000) €8,000
VAT Payable (430000) 2,000
Total Current Liabilities €10,000
Noncurrent Liabilities:
Bank Loan (120000) 20,000
Total Noncurrent Liabilities 20,000
TOTAL LIABILITIES €30,000
EQUITY
Share Capital (101000) €15,000
Retained Earnings (104000) 25,000
(Beginning €10,000 + Net Income €15,000)
Total Equity 40,000
TOTAL LIABILITIES AND EQUITY €70,000
Key Points:
- Assets = Liabilities + Equity (€70,000 = €30,000 + €40,000) ✓
- Assets listed in order of liquidity (most liquid first)
- Liabilities listed by due date (current first)
- Equity comes from Statement of Owner's Equity
- Totals must balance
Verification: Do the Statements Connect?
Let's verify the statements are properly connected:
-
Income Statement → Statement of Owner's Equity:
- Income Statement: Net Income = €15,000 ✓
- Statement of Owner's Equity: Net Income = €15,000 ✓
-
Statement of Owner's Equity → Balance Sheet:
- Statement of Owner's Equity: Ending Equity = €40,000 ✓
- Balance Sheet: Total Equity = €40,000 ✓
-
Balance Sheet Equation:
- Assets (€70,000) = Liabilities (€30,000) + Equity (€40,000) ✓
All statements are properly connected!
Luxembourg Formatting Requirements
When preparing financial statements for filing with RCS in Luxembourg:
-
Must follow PCN format:
- Use PCN account classifications
- Include account numbers
- Follow PCN presentation requirements
-
Must be in one of three languages:
- French
- German
- English
-
Must include:
- Company name and legal form (SARL, SA, etc.)
- Fiscal year end date
- Proper account classifications
- Notes to financial statements (Annexe)
-
Electronic filing:
- Must be filed electronically via eCDF or RCS portal
- PDF format required
Think It Through
If Tech Solutions SARL had a Net Loss of €5,000 instead of Net Income of €15,000, how would this affect: a) The Statement of Owner's Equity? b) The Balance Sheet? c) The accounting equation?
Concepts in Practice
Luxembourg Abbreviated vs. Full Financial Statements:
Smaller companies in Luxembourg may prepare abbreviated financial statements (comptes abrégés) if they meet certain criteria:
- Turnover < €4.4 million
- Total assets < €2 million
- Average employees < 50
Larger companies must prepare full financial statements (comptes complets) with more detailed disclosures.