To determine the correct statement regarding a worksheet and formal financial statements, let's review each given option in detail:
1. When the Debit column of the Income Statement columns is greater than the Credit column, the company will be reporting a net income.
This statement is incorrect. In accounting, net income occurs when the Credit column (representing revenues) is greater than the Debit column (representing expenses). If the Debit column is greater, it implies that expenses exceed revenues, resulting in a net loss.
2. The totals of the Balance Sheet & Owner's Equity columns will be equal to revenues minus expenses for the period.
This statement is also incorrect. The Balance Sheet represents the accounting equation: Assets = Liabilities + Owner's Equity. It does not merely reflect revenues minus expenses. Furthermore, revenues minus expenses determine the net income or loss, which is a part of the Owner's Equity under Retained Earnings but not directly related to the Balance Sheet totals.
3. The Withdrawals account balance will be used to prepare the balance sheet.
This statement is incorrect. The Withdrawals account (also known as Drawings) is used to reflect the amount taken out from the business by the owner for personal use. This account is not shown on the balance sheet but is used in the Owner's Equity section of the Statement of Owner's Equity.
4. The Withdrawals account balance will be used in preparing the statement of owner's equity.
This statement is correct. The Statement of Owner's Equity accounts for the Withdrawals to show how much the owner has drawn from the business over the period. It adjusts the Owner's Equity by subtracting the withdrawals from the capital plus the net income or loss.
Therefore, the correct statement is:
"The Withdrawals account balance will be used in preparing the statement of owner's equity."
So the correct answer is:
4. The Withdrawals account balance will be used in preparing the statement of owner's equity.
