KYAMBOGO UNIVERSITY

FACULTY OF ENGINEERING

DEPARTMENT OF MECHANICAL AND PRODUCTION

ENGINEERING

ORDINARY DIPLOMA IN AUTOMOBILE ENGINEERING

YEAR TWO

SEMESTER TWO

GROUP ASSIGNMENT

COURSE UNIT: ENTREPRENUERSHIP AND ACCOUNTING

COURSE UNIT CODE: TDAE 2204

LECTURER’S NAME: MS. ANENA PHOEBE M

QUESTION 1: Write short notes about elements of financial statement.

 GROUP D

NAMES REGISTRATION SIGNATURE

NUMBER

NANYONJO SHAKIRAH 19/U/DAE/961/PE

NAMATOVU LILLIAN SYLVIA 19/U/DAE/989/PE

SSENDYOSSE GERALD 19/U/DAE/954/PE

KAWUZI DOUGLAS 19/U/DAE/20082/PE

NAMBEJJA ANGELLA 19/U/DAE/20084/PE

AMAITUM EMMANUEL 19/U/DAE/968/PE

WALUYA KEVIN 19/U/DAE/19739/PE

BALABA HAKIM 19/U/DAE/18022/PE

JUNIOR MICHEAL 19/U/DAE/20083/PE

 INTRODUCTION: ELEMENTS OF FINANCIAL STATEMENTS

A Financial statement is a formal record of the financial activities and position of a business,
person, or other entity.

OR

Financial statements are written records that convey the business activities and financial
performance of a company. Financial statements are often audited by government agencies,
accountants, firms and so many others.

TYPES OF FINANCIAL STATEMENTS

 Balance sheet; This provides an overview of assets, liabilities and stockholders’ equity
as a snapshot in time.
 Income statement; An income statement primarily focuses on a company’s revenue and
expenses during a particular period.
 Cash flow statement (CFS); This measures how well accompany generates cash to pay
its debt obligations, fund its operating expenses and fund investment.

PURPOSES OF A FINANCIAL STATEMENT

 To ensure accuracy.
 For tax purposes.
 For financing purposes.
 Investing purposes.

ELEMENTS OF FINANCIAL STATEMENTS.

Elements of financial statements are the general groupings of line items contained within the
statements. These groupings will vary depending on the structure of the business. Thus, the
elements of the financial statements of a profit business vary somehow from those incorporated
into a non-profit business (which has no equity accounts).

The main elements of financial statements include the following;

 a) ASSETS;

Assets are items of economic benefit that are expected to yield benefits in future periods.

Or

Assets can be defined as resources controlled by the entity as a result of the past events and from
which economic benefits are expected to flow to the entity.

Assets are grouped into two main categories, namely; Current assets and Fixed assets.

These categories are used to aggregate assets into different blocks in the financial statement, so
that an entity can discern the relative liquidity of the assets of an organization.

 Current Assets; Current assets are highly liquid assets that can be quickly sold and
converted into currency. Financial assets like cash, bonds, mutual funds, stocks, and
other marketable securities are considered the most liquid current assets meaning that
an asset can be sold easily and quickly without affecting its price.
 Fixed Assets; Fixed assets, also referred to as long-term assets, may take a long time
to earn cash value and are generally considered low-liquidity, meaning that they often
cannot quickly be sold at their desired value. Some examples of fixed assets include
buildings, land, furniture, or any other type of asset that is not intended for sale within
the year.

Fixed assets are further categorized into four forms, namely;

 Tangible assets; Tangible assets are real property like inventory, real estate,
machinery, cash, or furniture that is physically tangible and are often in the owner’s
possession. Most tangible assets are also considered current assets.
 Intangible assets; Intangible assets are items or goods that exist theoretically rather
than physically. Some examples of intangible assets include permits, intellectual
property, patents, brand reputation, and trademarks, which in turn have their value
boosted through successful use.
  Operating assets: Operating assets are any assets that generate revenue through day-
to-day business operations and help maintain workflow. Some examples of operating
assets are copyrights, licenses, inventory, or machinery.
 Non-operating assets: Non-operating assets are business owned items that generate
revenue but are not necessarily needed for everyday operations, such as vacant land
or short-term investments.

b) LIABILITIES.

Liabilities are the legal obligations of an entity for paying to another organization or
individual.

In other words a liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.

A liability is defined by the following characteristics;

 Any type of borrowing from persons or banks for improving a business or personal
income that is payable during short or long time.
 A duty or responsibility to others that entails settlement by future transfer or use of
assets, provision of services, or other transaction yielding an economic benefit at a
specified or determinable date on occurrence of a specified event or on demand.
 A duty or responsibility that obligates the entity to another leaving it little or no
discretion to avoid settlement.
 A transaction or event obligating the entity that has already occurred.

Liabilities in financial accounting need not be legally enforceable but can be based on equitable
obligations or constructive obligations.

An equitable obligation is a duty based on ethical or moral considerations.

A constructive obligation is an obligation that is implied by a set of circumstances in a

particular situation as opposed to a contractually based obligation.

The accounting equation relates assets, liabilities, and owner's equity:

Assets = Liabilities + Owner's Equity

 Liabilities are reported on a balance sheet and are usually divided into two categories
namely;

 Current Liabilities; These are the obligations that are expected to get settled within
12 months of their creation date. They usually include payables such as wages,
accounts, taxes, and accounts payable, unearned revenue when adjusting entries,
portions of long-term bonds to be paid this year and short-term obligations for
example from purchase of equipment.
 Non-Current Liabilities; These are obligations or liabilities that get settled in more
than 12months from the date of their creation. They usually include issued long-term
bonds, notes payables, long-term leases, pension obligations, and long-term product
warranties.

Examples of Liabilities include;

 Overdraft; This occurs when money is withdrawn in excess of what is on the current
account. In this situation the account is said to be “Overdrawn”
 Tax payable; which is the actual amount owned in taxes based on the rules of the tax
code. The payable amount is recognized on the balance sheet as a liability until the
company settles the tax bill.
 Interest payable; This is the amount of interest on its debt that a company owes to its
lenders as of the balance sheet date.
 Salary payable and Bank loan

Liabilities of uncertain value or timing are called provisions and when a company deposits cash
with a bank, the bank records a liability on its balance sheet representing the obligation to repay
the depositor usually on demand. Simultaneously, in accordance with the double-entry principle,
the bank records the cash and itself as an asset. The company on the other hand, upon depositing
the cash with the bank, records a decrease in its cash and a corresponding increase in its bank
deposits (an asset).
 c) EQUITY;

Equity is the amount invested in a business by its owners plus any remaining retained
earnings.

Equity represents the value that would be returned to a company's shareholders if all of the assets
were liquidated and all of the company's debts were paid off. In other words equity is ownership
of assets that may have debts or other liabilities attached to them. Equity is measured for
accounting purposes by subtracting liabilities from the value of the assets.

For example, if someone owns a car worth $24,000 and owes $10,000 on the loan used to buy
the car, the difference of $14,000 is equity. Equity can apply to a single asset, such as a car or
house, or to an entire business.

 We can also think of equity as a degree of residual ownership in a firm or asset after
subtracting all debts associated with that asset.
 Equity represents the shareholders’ stake in the company, identified on a company's
balance sheet.
 The calculation of equity is a company's total assets minus its total liabilities, and it's
used in several key financial ratios such as ROE.

When liabilities attached to an asset exceed its value, the difference is called a deficit. Equity is
known as "net position" or "net assets". The equity of the business, like the equity of an asset,
approximately measures the amount of the assets that belongs to the owners of the business.

d) REVENUE. This is an increase in assets or decrease in liabilities caused by the provision

of services or products to customers. It is a quantification of the gross activity generated
by a business. Examples are product sales and service sales.
e) EXPENSES. This is the reduction in value of an asset as it is used to generate revenue.
Examples include interest expense, compensation expense and utilities expense.

An entity is said to have incorrect expenses if any of the following two happens;

 Reduction in economic benefits during the accounting period via cash out flow.
 Decrease in assets.
Besides the above two, expenses shall also include the expenditure incurred on item likes
wages paid, expenses that occur in the normal course of business and other losses that usually
do not occur in the ordinary course of business.

Expenses are recorded in the profit and loss account in accordance with the revenue
generated. An expense will automatically be created in the profit and loss account when
assets value becomes NIL and no future economic benefits are expected from it.

Expenditure can be of the following two types namely;

 Capital Expenditure; This is incurred in relation to fixed assets that are expected to
yield economic benefits for a long period of time.
 Revenue Expenditure; This expenditure is in relation to particular revenue
transactions or operating periods. These usually include expenses related to wear and
tear of fixed assets.

Examples of Expenses include;

 Depreciation; which is the reduction of the recorded cost of a fixed asset in a

systematic manner until the valve of the asset becomes zero or negligible.
Depreciation represents how much of an asset’s value has been used.
 Marketing Expense; This is the amount of money the company spends on
marketing. Some common marketing expenses include marketing research, public
relations and advertising costs.
 Interest Expense; this is the cost incurred by an entity for borrowed funds. For
example; Loans, Bonds, convertible debt or lines of credit.
 Transportation costs; These are all the expenses related to the transportation of raw
materials, finished products and employees. So in summary, its the money behind
making sure all moving parts get where they need to be so that your customers get
their product or service on time.
 Repair and Maintenance; These are expenses for normal maintenance and up keep
of capital assets that are necessary to keep the assets that are necessary to keep the
assets in their usual condition. These expenses are recurring in nature and do not
extend the useful life of the asset.
REFERENCES

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