BIT 163

INTRODUCTION TO ACCOUNTINGCHAPTER TWO

Financial Statement (FS)

Definition of FS-Describe the information presented

in financial statements, be able to prepare simple financial statements, an analyze a company’s performance with the return on equity ratio.

Trading Account

The Income Statement

CLEAR COPY CO.Income Statement

For Month Ended December 31, 19X1

RevenuesCopy services revenue 3900

Operating ExpensesRent expense 1000Salaries expense 700Total Operating exoenses 1700Net Income 2200

The elements of IS Revenues-Inflows of assets received in exchange for goods

or services provided to customers as part of the major or central operations of the business.

-Decreases in liabilities Expenses-Outflows or the using up of assets as a result of

the major or central operations of a business.-Increases in liabilities

Balance Sheet

The financial Statement drawn up at the end of an accounting period, it is record details of the companies assets, liabilities and owner’s equity (capital).

Balance SheetCLEAR COPY CO.

Balance SheetDecember 31, 19X1

Assets RM Liabilities RMCash 8400 Accounts Payable 6200Store Supplies 3600 Owner's EquityCopy equipment 26000 Terry Dow, capital 31800

Total Assets 38000Total Liabilities and Owner's Equity 38000

Assets, Liabilities and Equity Assets in general is the business properties or

economic resources owned by the business. Assets defined as probable future economic

benefits obtained or controlled by a particular entity as a result of past transaction or events

Assets are things owned by the business and they fall under two headings:-Fixed eg Land, Buildings, Fixtures and Fittings, Office Equipment (Computers), Software and machinery for long term used.-Current eg Cash, Debtors (Account Receivables), patent or copyright

Assets, Liabilities and Equity The liabilities of a business are its debts to

others. Liabilities are defined as probable future sacrifices

of economics benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as the result of past transactions or events.

Liabilities are things owed by the business and they falls under two headings:Long Term eg Bank Loan and Mortgage > one year to repayCurrent eg Overdraft and Creditor < one year to repay

Assets, Liabilities and Equity

Owner’s equity is defined as “the residual interest in the assets of an entity that remains after deducting its liabilities. Also called as net assets.

Its comprises that funds invested in the business by the owner plus any profits retained for use in the business less any share of profits paid out of the business to the owner. There are five components such as Opening Capital, Additional Capital, Drawings, Net Profit/Net Loss and Closing Capital.

E.G Capital is money or any other asset used by proprietor to start or run a business

AP

Account Payable (Creditor)A person or company that the firm

owed money to them for goods or services received. Eg: if designing company bought material from company B on credit than the company B become creditor to the firm.

AR

Account Receivable (Debtor)A person or company which owes

moneyto the firm for a goods and services

supplied to them.E:g If Designing Firm giving its services to company A on credit than the company (A) become Debtor to the firm.

Accounting Equation

The fundamental concepts of accounting is base on the accounting equation

Assets=Liabilities + Owner’s EquityOr

Assets=Liabilities + Owner’s Equity + Revenue - Expenditure

The effects of transactions on the accounting equation

Please refer the excel spreadsheet as per below slide.

Accounting EquationEquality of the Accounting EquationAssets or any other item of the accounting equation can increase or decrease by Assets will always equal to equity + liabilities.

Transaction Effect of the transaction

1) Asset Asset or Liability or Equity

Example givena. Bought goods on CashStock (Asset) Increase Cash (Asset) Decrease

b. Bought goods on CreditStock (Asset) Increase Creditor (Liability) Increase

c. Owner brought own money to businessCash (Asset) Increase Capital (Equity) Increase

2) Asset decrease Asset Increase or Liability Decrease or Equity Decrease

Example givena. Debtor pay his account by chequeDebtor (Asset) Decrease Bank (Asset) Increase

b. Pay Creditor by chequeBank (Asset) Decrease Creditor (Liability) Decrease

c. Owner takes some good for personal useStock (Asset) Decrease Capital (Equity) Decrease

Continue……3) Liability Increase Liability Decrease or Asset Decrease

Example given

a. Pay creditor by Overdraft

Overdraft (Liablity) Increase Creditor Decrease

b. Owner gets bank loan for business

Loan (Liability) Increase Bank (Asset) Increase

4. Liability Decrease Liability Increase or Asset Decrease

Example given

a. Repay bank loan by Overdraft

Loan (Liability) Decrease Overdraft (Liablity) Increase

b. Pay bank loan by cheque

oan (Liability) Decrease Bank (Asset) Decrease

5. Expenditure Increase Net Profit Decrease or Net Loss Increase

6. Revenue Increase Net Profit Incerase or Net Loss Decrease