Accounting for Managers

MBA 533

Dr O. Muvingi
Mobile: +263 779965258 or +263 713229428
Email. o.muvingi@hotmail.co.uk
Accounting Basics
 Learning Objectives
▪ Understand Accounting language
▪ Understand the Rules of Debit and Credit
▪ Pass Journal Entries
▪ Prepare Ledger Accounts
▪ Prepare a simple Trial Balance
▪ Make Adjustment and Closing Entries
▪ Explain the nature and purpose of the three major financial statements;
▪ Prepare a simple statement of financial position and interpret the information that it
contains;
▪ Discuss the accounting conventions underpinning the statement of financial position;
▪ Discuss the uses and limitations of the statement of financial position for decision-
making purposes.
 Accounting Language
Financial statements
A set of accounting documents prepared for a business that cover a particular time
period and describe the financial health of the business.

The key financial statements of a business

Statement of
Cashflows
 Accounting Language

Transaction
▪ Any event that affects the financial position of the business or organisation and
requires recording.
▪ In some transactions, such as bank or mobile money transfers, money changes
hands.
▪ However, in other transactions, such as dispatching an invoice to a customer, no
money changes hands.
 Accounting language
Double Entry Bookkeeping
• Each transaction made in the accounting system is entered twice.
• This does not imply that we are keeping two sets of books.
• It means every transaction is entered into the books twice in order reflect where
the money came from (the giver) and where the money is going(the receiver).
• Literature attributes the development of the double entry to an Italian monk,
Luca Pacioli in 1494.
 The Accounting Process

This process comprises of three parts:

a) Recording of business transactions during an accounting period;
b) Summarizing of information at the end of the accounting period and
c) Reporting and interpreting of the summarised information.
 The Accounting Process
• During an accounting period accountants record transactions as and when they
occur.
• At the end of each accounting period they summarize the information recorded
and prepare the trial balance to ensure that the double entry system has been
maintained.
• The summarization of the information recorded is often followed by certain
adjusting entries which are to be made to account for changes that may have taken
place way after the transactions were recorded.
• When the recording aspect has been made as complete and up-to-date as possible
accountants then prepare financial statements reflecting the financial position and
the results of business operations.
 The Account

Definition
• This is the place where we record amounts of money involved in transactions.
• A statement wherein information relating to all items are accumulated
• An account shows the total amount of money in one place as a result of all
transactions affecting that account.
 The Account

• The transactions that take place in a business enterprise during a specific period
may effect increases and decreases in assets, liabilities, capital, revenue and expense
items.
• To make up to-date information available when needed and to be able to prepare
timely periodic financial statements, it is necessary to maintain a separate record for
each item.
• For example, it is necessary to have a separate record devoted exclusively to record
increases and decreases in cash, another one to record increases and decreases in
supplies, a third one on machinery, etc.
• An account is a statement wherein information relating to an item or a group of
similar items are accumulated.
 The Account
The simplest form of an account has three parts:
a) A title which gives the name of the item recorded in the account
b) A space for recording increases in the amount of the item, and
c) A space for recording decreases in the amount of the item.
d) This form of an account is known as a ‘Т’ account because of its similarity to the
letter ‘t’ as illustrated here:
 Debit and Credit
• The left-hand side of any account is called the debit side and the right-hand side is
called the credit side.
• Amounts entered on the left-hand side of an account, regardless of the tile of the
account are called debits and the amounts entered on the right-hand side of an
account are called credits.
• To debit (Dr) an account means to make an entry on the left-hand side of an
account and to credit (Cr) an account means to make an entry on the right-hand side.
• The words debit and credit have no other meaning in accounting, though in
common jargon; debit has a negative connotation, while credit has a positive
connotation.
• Some entries for business transactions will always go to the left side of the T
Account and others will always go to the right side.
 Double Entry

▪ Double entry system of recording business transactions is universally followed.

▪ In this system for each transaction the debit amount must equal the credit amount.
If not, the recording of transactions is incorrect.
▪ The equality of debits and credits is maintained in accounting simply by specifying
that the left side of asset accounts is to be used for recording increases and the right
side to be used for recording decreases; the right side of a liability and capital
accounts is to be used to record increases and the left side to be used for recording
decreases.
▪ The account balances when they are totaled, will then conform to the two equations:
a) Assets = liabilities + owners’ equity
b) Debits = credits
Double Entry
 The rules of debits and credits

▪ The rules of revenue accounts and expense accounts can be derived from the rule that
credit signifies increase in owners’ equity and debit signifies decrease in owner’s equity.
▪ Revenues increase the owners’ equity as they belong to the owners.
▪ Since owners’ equity accounts increase on the credit side, revenue must be credits.
▪ So, if the revenue accounts are to be increased, they must be credited and if they are to
be decreased, they must be debited.
▪ Similarly expenses decrease the owners’ equity.
▪ As owners’ equity account decreases on the debit side expenses must be debits.
▪ So to increase the expense accounts, they must be debited and to decrease it, they must
be credited.
 The Journal

▪ When a business transaction takes place, the first record of it is done in a book
called the journal.
▪ The journal records all the transactions of a business in the order in which they
occur.
▪ The journal may therefore be defined as a chronological record of accounting
transactions.
▪ It shows names of accounts that are to be debited or credited, the amounts of
the debits and credits and any other additional but useful information about the
transaction.
▪ A journal does not replace but precedes the ledger.
 The Journal
3 August 2021

▪ The debit entry is listed first, and the debit amount appears in the left-hand amount column;
▪ The account to be credited appears below the debit entry and the credit amount appears in the
right- hand amount column.
▪ The data in the journal entry are transferred to the appropriate accounts in the ledger by a
process known as posting.
▪ Any entry in any account can be made only on the basis of a journal entry.
▪ The column l.f. which stands for ledger folio gives the page number of accounts in the ledger
wherein posting for the journal entry has been made.
▪ After all the journal entries are posted in the respective ledger accounts, each ledger account is
balanced by subtracting the smaller total from the bigger total.
▪ The resultant figure may be either Debit or Credit balance and vice-versa.
 The Ledger

▪ A ledger is a set of accounts.

▪ A ledger contains all the accounts of a specific business or organisation.
▪ Hence, transactions are recorded first of all in the journal and then they are
posted to the ledger.
▪ Hence the journal is called the book of original or prime entry and the ledger
is the book of second entry.
▪ While the journal records transactions in a chronological order, the ledger
records transactions in an analytical order.
 The Trial Balance
▪ A list of the account names and their balance as of a given moment of time with debit
balances in one column and credit balances in another column.
▪ It is prepared to ensure that the mechanics of the recording and posting of the
transaction have been carried out accurately.
▪ If the recording and posting have been accurate, then the debit and credit total in the
trial balance must tally thereby evidencing that an equality of debits and credits has
been maintained.
▪ Caution – the mere agreement of the debt and credit total in the trial balance is not
conclusive proof of correct recording and posting.
▪ There are many errors which may not affect the agreement of trial balance like total
omission of a transaction, posting the right amount on the right side but of a wrong
account etc.
 The Trial Balance
Class Exercise 1:
a) On 1 January 2021 Silas established a business with a capital injection of $3,000. He
also employed two workers.
b) On January 2 Silas purchased goods worth $2,000
c) On January 9 he received an order for half of the goods from TNT
d) On January 12 he delivered the goods to TNT and invoiced the goods at $1,300
e) On January 15 Silas received an order from RTN for the remaining half of the total
goods purchased
f) On January 21 Silas delivered goods to RTN and received cash amounting to $1,200
g) On January 30 TNT made a payment of the goods Silas had delivered and invoiced
for on 12 January.
h) On January 31 Silas paid salaries amounting to $210 and he also received interest
amounting to $50
 The Trial Balance
❑January 1 – Establishing the Business with 3,000

• The two accounts involved are cash and owners’ equity.

• Cash, an asset increases and hence it has to be debited.
• Owners’ equity, a liability also increases and hence it has to be credited.
 The Trial Balance

❑January 2 – Purchase of Goods amounting to $2,000

• The two accounts affected by this transaction are cash and goods (purchases).
• The cash balance decreases and hence it is credited and goods on hand, an asset,
increases and hence it is debited.
 The Trial Balance

❑January 9 – Received a purchase order for half of the goods from TNT

• No entry is required as realization of revenue will take place only when goods
are delivered (realization concept).
 The Trial Balance

❑January 12 – Delivered the goods, to TNT and invoiced the goods at $1,300:
• This transaction affects two accounts – goods (sales) a/c and receivables a/c.
• Since it is a credit transaction, receivables increase (asset) and hence it is to be
debited.
• Sales decreases goods on hand and hence goods (sales) a/c is to be credited.
• Since the term ‘goods’ is used to mean purchase of goods and sale of goods, to
avoid confusion, purchase of goods is simply shown as purchases a/c and sale of
goods as sales a/c.
 The Trial Balance

❑January 15 – Received order for remaining half of goods:

• No entry.
 The Trial Balance

❑January 21 – Delivered goods and received cash amounting to $1,200

• This transaction affects cash a/c and sales account.

• Since cash is realized, the cash balance will increase and hence cash account is to be
debited.
• Since the stock of goods becomes nil due to sale, sales a/c is to be credited (as asset
in the form of goods on hand has reduced due to sales).
 The Trial Balance

❑January 30 – TNT made a payment for the goods delivered on January 12

• The accounts affected by this transaction are asset accounts – cash and receivables.
• Cash balance increases and hence it is debited.
• Receivables balance decreases and hence it is credited.
 The Trial Balance

❑January 31 – Payment of salaries amounting to $210

• As a result of the payment of salaries cash balance decreases and hence cash account
is credited.
• A salary is an expense and since expense has the effect of reducing owners’ equity
and as owners’ equity account decreases on the debit side, expenses account is to be
debited.
 The Trial Balance

❑January 31 – Received Interest amounting to $50

• The receipt of interest increases cash balance and hence cash a/c is debited.
• Interest being revenue which has the effect of increasing the owners’ equity, it is
credited as owners’ equity account increases on the credit side.
 The Trial Balance
The journal
entries of the $ $ $ $
transactions
we have
worked on
$ $
are posted
into
respective
ledger
$ $ $ $
accounts
which in turn
are balanced
$ $
$ $
 The Trial Balance
The journal
entries of the
transactions $ $

we have $
$

worked on are
posted into
respective
ledger
accounts
which in turn
are balanced
 Closing Entries
▪ Periodically, usually at the end of the accounting period, all revenue and expense account
balances are transferred to an account called income summary or profit and loss account and
are then said to be closed.
▪ The balance in the profit and loss account, which is the net income or net loss for the period,
is then transferred to the capital account and thus the profit and loss account is also closed.
▪ In the case of businesses, the net income or net loss is transferred to retained earnings account
which is a part of owners’ equity.
▪ The entries which are passed for transferring these accounts are called as closing
entries.
▪ Because of this periodic closing of revenue and expense accounts, they are called as
temporary or nominal accounts.
▪ On the other hand, the assets, liabilities and owners’ equity accounts, the balances of which are
shown on the balance sheet and are carried forward from year to year are called as permanent
or real accounts.
 Closing Entries
• The principle of framing a closing entry is very $ $
simple.
• If an account is having a debit balance, then it
is credited and the profit and loss account is
debited.
• Similarly if a particular account is having a
credit balance, it is closed by debiting it and
crediting the profit and loss account.
• In Silas’ business example the sales account and $ $

interest account are revenues. The purchases

account and the salaries account are expenses.
• The purchases account is an expense because
the entire goods have been sold out in the $ $
accounting period itself and hence they
become cost of goods sold out.
 Adjusting Entries
• Because of accrual
accounting, we normally find
that after the preparation of Adjusting
the trial balance there are entries
adjustments relating to the categories
accounting period that may
have to be made in order to
make the financial Revenue Expenses
statements complete.
• These adjustments relate to
transactions which have not
Revenue Unrecorded Prepaid
been recorded but which Unrecorded
received in
affect the financial position revenues
advance expenses expenses
and operating results of the
business.
 Adjusting entries

Unrecorded Revenues
• Income earned for the period but not received in cash.
For example, interest for the last quarter of the accounting period amounting to
$25 is yet to be received though it is due.

The adjusting entry is

Dr Accrued interest a/c $25

Cr Interest a/c (Cr) $25
 Adjusting entries

Revenues received in advance

Income relating to the next period received in the current accounting period:
For example, Rent amounting to $100 received in advance.

The adjusting entry is

Dr Rent a/c $100
Cr Rent received in advance a/c $100
 Adjusting entries

Unrecorded Expenses:
Expenses were incurred during the period but no record of them as yet has been
made:
For example, wages amounting to $150 that were earned by an employee during the
period and are yet to be paid.

The adjusting entry is

Dr Wages a/c $150
Cr Accrued Wages a/c (Cr) $150
 Adjusting entries

Prepaid Expenses
Expenses relating to the subsequent period paid in advance in the current
accounting period.
For example, insurance amounting to $45 was paid in advance.

The adjusting entry is

Dr Prepaid Insurance a/c $45
Cr Insurance a/c $45
 Adjusting entries

❖Unrecorded revenues and prepaid ❖Other adjustments made relate to the

expenses are assets and hence
debited (as debit may signify
increase in assets)
❖Revenues received in advance and
unrecorded expenses are liabilities
and hence credited (as credit may
signify increase in liabilities).
following:
✓ Inventory at the end of the
accounting period
✓ Provision of depreciation
✓ Provision for bad debts
✓ Provision for discount on receivables
and payables
 Summary of the Accounting process

Six steps taken sequentially complete the accounting process

❖ Step 1 and the most important part of the accounting process is the analysis of the
transactions to decide which account should be debited and which account should be credited.
❖ Step 2 involves journalizing the transactions (recording the transactions in the journal).
❖ Step 3 entails posting the journal entries into respective accounts in the ledger and the ledger
accounts are balanced.
❖ Step 4. involves the preparation of a trial balance at the end of the accounting period, to
ensure quality of debits and credits.
❖ Step 5 involves making adjustments and closing entries to enable the preparation of financial
statements.
❖ Step 6 entails the preparation of financial statements.
 Summary of the Accounting process

Debit: signifies increase in asset accounts, decrease in liability accounts and decrease
in owners’ equity accounts.

Credit: signifies decrease in asset accounts, increase in liability accounts and increase in
owners’ equity accounts.

Ledger a set of accounts of a specific business enterprise.

Trial Balance: a list of balances of accounts to ensure arithmetical accuracy.

Closing Entries: entries passed to transfer the revenue accounts to profit and loss a/c.
Self-Assessment Exercise
Ruvarashe established a business in Harare in March 2022. She has asked you to help her with the accounting process for
the first month of operation.
She provides you the following transactions relating to the business.
a) On March 1, Ruvarashe injected capital amounting to $9 000 into the business. She also hired three (3) employees.
b) On March 2, Ruvarashe purchased furniture worth $300
c) On March 3, she purchased goods worth $6 000
d) On March 11, Ruvarashe received a purchase order for half-of the goods from Chido.
e) On March 15, Ruvarashe delivered the goods Chido ordered and raised an invoice amounting to $4 000
f) On March 17, Ruvarashe received order for the remaining half of the goods from Tinotenda.
g) On March 21, she delivered the goods ordered by Tinotenda and received cash amounting to $3 800
h) On March 31, Ruvarashe paid wages amounting to $300 for the three employees.

REQUIRED
Assist Ruvarashe with the following:
a) Journalise the transactions for March 2022.
b) Post the transactions into ledger accounts.
c) Balance the accounts and
d) Prepare the trial balance.
 Preparing Financial Statements
❖The role of accounting conventions: Chapter 2 Atrill and McLaney

Accounting has
several conventions,
Money
or rules, that have measurement
evolved over time.
They have evolved
as attempts to deal
with practical
problems
experienced by
preparers and users
of financial
statements, rather
than to reflect
some theoretical
 Preparing Financial Statements
❖ The role of accounting conventions: Chapter 2 Atrill and McLaney

Business entity convention

• For accounting purposes, the business and its owner(s) are treated as being quite separate and distinct.
• As a result, owners are treated as being claimants against their own business in respect of their investment.
• The business entity convention must however be distinguished from the legal position that may exist between
businesses and their owners.
• For sole proprietorships and partnerships, the law does not make any distinction between the business and its
owners
• However, for limited companies – i.e., firms set up in terms of the Companies and other Business Entities Act
[Chapter 24:31] in the case of Zimbabwe, there is a clear legal distinction between the business and its owners.
➢ the limited company is regarded as having a separate legal existence.)
• For accounting purposes, these legal distinctions are irrelevant, and the business entity convention applies to all
businesses.
 Preparing Financial Statements
❖ The role of accounting conventions: Chapter 2 Atrill and McLaney
Historic cost convention
• The historic cost convention proposes that the value of
assets shown on the statement of financial position should
be based on their historic cost (that is, acquisition cost).
• The use of historic cost means that problems of
measurement reliability are minimised as the amount paid
for a particular asset is often a matter of demonstrable fact.
• Reliance on opinion is avoided, or at least reduced, which
should enhance the credibility of the information in the
eyes of users.
• A key problem, however, is that the information provided
may not be relevant to user needs.
• Even quite early in the life of some assets, historic costs
may become outdated compared with current market
values. This may be misleading in assessing current
financial position.
Current Value
• Many argue that recording assets at their current value would
provide a more realistic view of financial position and would
be relevant for a wide range of decisions.
• A system of measurement based on current value does,
however, bring its own problems.
• The term ‘current value’ can be defined in different ways.
• It can be defined broadly as either the current replacement
cost or the current realisable value (selling price) of an asset.
• These two types of valuation may result in quite different
figures being produced to represent the current value of an
item.
• Furthermore, the broad terms ‘replacement cost’ and
‘realisable value’ can be defined in different ways.
 Preparing Financial Statements
❖ The role of accounting conventions: Chapter 2 Atrill and McLaney

Despite the challenges

Some of the problems associated with
problems current values, they are
associated increasingly used when
with current reporting assets in the
value statement of financial
accounting position. This has led to a
steady erosion in the
importance of the historic
cost convention.
Thus, many businesses now
prepare financial statements
on a modified historic cost
basis.
 Preparing Financial Statements
❖ The role of accounting conventions: Chapter 2 Atrill and McLaney

Prudence convention
• The convention holds that caution should be exercised when making accounting judgements.
• The application of this convention normally involves recording all losses at once and in full; this refers to
both actual losses and expected losses.
• Profits, meanwhile, are recognised only when they actually arise.
• Greater emphasis is therefore placed on expected losses than on expected profits.
• The prudence convention evolved to counteract the excessive optimism of some managers and is designed to
prevent an overstatement of financial position and performance.
• Applying this convention, however, requires judgement.
• This means that the way in which it is applied by preparers of financial statements may differ over time and
between businesses.
• Where excessive prudence is applied, it will lead to an understatement of profits and financial position.
• This will mean a consistent bias in the reporting of both financial performance and position .
 Preparing Financial Statements
❖ The role of accounting conventions: Chapter 2 Atrill and McLaney

Going concern convention

• The going concern convention holds that the financial statements should be prepared on the assumption that a business will
continue operations for the foreseeable future, unless there is evidence to the contrary.
• In other words, it is assumed that there is no intention, or need, to sell off the non-current assets of the business.
• Where a business is in financial difficulties, however, non-current assets may have to be sold to repay those with claims against the
business.
• The realisable (sale) value of many non-current assets is often much lower than the values reported in the statement of financial
position.
• In the event of a forced sale of assets, therefore, significant losses might arise.
• These losses must be anticipated and fully reported when a business’s going concern status is called into question.
 Preparing Financial Statements
❖ The role of accounting conventions: Chapter 2 Atrill and McLaney

Dual aspect convention

• The dual aspect convention holds that each transaction
has two aspects, both of which will affect the statement
of financial position.
• This relates to the double entry bookkeeping we
discussed earlier
• Examples for Double entry
➢ The purchase of a motor car for cash results in an
increase in one asset (Dr motor car) and a decrease in
another assets (Cr cash).
➢ The repayment of borrowings results in the decrease in a
liability ( Dr borrowings) and the decrease in an asset (
Cr cash).

Recording the dual aspect of each transaction ensures that the statement of financial position will continue to balance
 Preparing Financial Statements
❖ The role of accounting conventions: Chapter 2 Atrill and McLaney
Money measurement
• A resource will be regarded as an asset and
included on the statement of financial position
only if it can be measured in monetary terms, with
a reasonable degree of reliability.
• Some resources of a business, however, do not
meet this criterion and so are excluded from the
statement of financial position.
• As a result, the scope of the statement of financial
position is limited.

There have been occasional attempts to measure and report resources of a business that are normally excluded from
the statement of financial position so as to provide a more complete picture of financial position.
Examples given - Goodwill and brands and human resources (football players)
High rates of inflation have resulted in statements of financial position, that are prepared on an historic cost basis,
reflecting figures for assets that were much lower than if current values were employed
 Preparing Financial Statements

Simple Example from Atrill and McLaney, 2017

Paul was unemployed and unable to find a job. He therefore decided to embark on
a business venture. Christmas was approaching, and so he decided to buy gift
wrapping paper from a local supplier and to sell it on the corner of his local high
street. He felt that the price of wrapping paper in the high street shops was
excessive, and that this provided him with a useful business opportunity.
He began the venture with $40 in cash. On the first day of trading, he purchased
wrapping paper for $40 and sold three-quarters of his stock for $45 cash.
 What cash movements took place during the first day of trading?
On the first day of trading, a cash flow statement showing the cash Simple Example from Atrill and McLaney,
movements for the day can be prepared as follows: 2017
a) Paul was unemployed and unable to find a
Cash flow statement for day 1 job. He therefore decided to embark on a
business venture. Christmas was
$ approaching, and so he decided to buy gift
wrapping paper from a local supplier and to
Opening balance (cash introduced) 40 sell it on the corner of his local high street.

Add Cash from sales of wrapping paper
Less Cash paid to purchase wrapping paper
Closing balance of cash
45 b) He felt that the price of wrapping paper in
the high street shops was excessive, and that
85 this provided him with a useful business
opportunity.
40 c) He began the venture with $40 in cash.
45 d) On the first day of trading, he purchased
wrapping paper for $40 and sold three-
quarters of his stock for $45 cash.
 How much wealth (that is, profit) was generated by the business during the first
day of trading?
A profit and loss account can be prepared to show the wealth (profit) Simple Example from Atrill and McLaney,
generated on the first day. 2017

• The wealth generated will represent the difference between the value a) Paul was unemployed and unable to find a
job. He therefore decided to embark on a
of the sales made and the cost of the goods (that is, wrapping paper) business venture. Christmas was
sold: approaching, and so he decided to buy gift
wrapping paper from a local supplier and
Profit and loss account for day 1 to sell it on the corner of his local high
$ street.
Sales revenue 45
Less Cost of goods sold (¾ of $40) 30 b) He felt that the price of wrapping paper in
Profit 15 the high street shops was excessive, and
that this provided him with a useful
business opportunity.
• Note that it is only the cost of the wrapping paper sold that is matched
against the sales revenue in order to find the profit, and not the whole c) He began the venture with $40 in cash.
of the cost of wrapping paper acquired. d) On the first day of trading, he purchased
• Any unsold stock (in this case ¼ of $40 = $10) will be charged against wrapping paper for $40 and sold three-
the future sales revenue that it generates. quarters of his stock for $45 cash.
 What is the accumulated wealth at the end of the first day?
To establish the accumulated wealth at the end of the Simple Example from Atrill and McLaney, 2017
first day, we can draw up a balance sheet. a) Paul was unemployed and unable to find a job.
He therefore decided to embark on a business
This will list the resources held at the end of that day: venture. Christmas was approaching, and so he
decided to buy gift wrapping paper from a local
supplier and to sell it on the corner of his local
high street.
Balance sheet at the end of day 1
b) He felt that the price of wrapping paper in the
$ high street shops was excessive, and that this
provided him with a useful business opportunity.
Cash (closing balance) 45 c) He began the venture with $40 in cash.
Stock of goods for resale (¼ of $40) 10 d) On the first day of trading, he purchased
wrapping paper for $40 and sold three-quarters
Total business wealth 55 of his stock for $45 cash.

Equity (40 (capital)+ 15 (profit) 55

 What is the closing balance on the second day of trading?
Cash flow statement for day 2
Opening balance (from the end of day 1)
Add Cash from sales of wrapping paper
Less Cash paid to purchase wrapping paper
Closing balance
Simple Example from Atrill and McLaney, 2017
$ a) Paul was unemployed and unable to find a job. He
therefore decided to embark on a business venture.
45 Christmas was approaching, and so he decided to buy
48 gift wrapping paper from a local supplier and to sell it
93 on the corner of his local high street.
20 b) He felt that the price of wrapping paper in the high
street shops was excessive, and that this provided him
73 with a useful business opportunity.
c) He began the venture with $40 in cash.
d) On the first day of trading, he purchased wrapping
paper for $40 and sold three-quarters of his stock for
$45 cash.
e) On the second day of trading, Paul purchased more
wrapping paper for $20 cash.
f) He managed to sell all of the new stock and all of the
earlier stock, for a total of $48.
 The profit and loss account for day 2 will be as follows:
Profit and loss account for day 2
Sales revenue
Less Cost of goods sold ($20 + $10)
Profit
Simple Example from Atrill and McLaney, 2017
a) Paul was unemployed and unable to find a job. He
therefore decided to embark on a business venture.
Christmas was approaching, and so he decided to buy
gift wrapping paper from a local supplier and to sell it
on the corner of his local high street.
b) He felt that the price of wrapping paper in the high
street shops was excessive, and that this provided him
$ with a useful business opportunity.
48 c) He began the venture with $40 in cash.
d) On the first day of trading, he purchased wrapping
30 paper for $40 and sold three-quarters of his stock for
$45 cash.
18 e) On the second day of trading, Paul purchased more
wrapping paper for $20 cash.
f) He managed to sell all of the new stock and all of the
earlier stock, for a total of $48.
 The balance sheet at the end of day 2 will be:
Balance sheet at the end of day 2
Cash (closing balance)
Stock of goods for resale
Total assets
Equity (40 + 15 +18)
Simple Example from Atrill and McLaney, 2017
a) Paul was unemployed and unable to find a job. He
therefore decided to embark on a business venture.
$ Christmas was approaching, and so he decided to buy
gift wrapping paper from a local supplier and to sell it
73 on the corner of his local high street.
b) He felt that the price of wrapping paper in the high
- street shops was excessive, and that this provided him
with a useful business opportunity.
73 c) He began the venture with $40 in cash.
73 d) On the first day of trading, he purchased wrapping
paper for $40 and sold three-quarters of his stock for
$45 cash.
e) On the second day of trading, Paul purchased more
wrapping paper for $20 cash.
f) He managed to sell all of the new stock and all of the
earlier stock, for a total of $48.
 Usefulness of the Statement of Financial Position
▪ It provides insights about how the business is financed and how its funds are deployed.
➢ how much finance is contributed by the owners and how much is contributed by outside lenders
➢ the different kinds of assets acquired and how much is invested in each kind

▪ It can provide a basis for assessing the value of the business

➢ It lists and places a value on the various assets and claims of a business and therefore it can provide a starting point for
assessing the value of the business.

▪ Relationships between assets and claims can be assessed

➢ E.g the relationship between how much wealth is tied up in current assets and how much is owed in the short term
(current liabilities)
➢ From this relationship, we can see whether the business has sufficient short-term assets to cover its maturing obligations

▪ Performance can be assessed.

➢ The effectiveness of a business in generating wealth can usefully be assessed against the amount of investment that was
involved.
➢ The relationship between profit earned during a period and the value of the net assets invested can be helpful to many
users, particularly owners and managers
Usefulness of the Statement of Financial Position

Question and Answer Session?