The financial statements of an organization shows the end result of its operations at the end of the

reporting period and comprises the followings

1. Balance Sheet – Otherwise called the positional statement because it shows the monetary value
of resources that the entity owns versus the amount it owes towards its various stakeholders
While preparing a balanced balance sheet the equation below needs to be well achieve
Assets = Liabilities +owner’s equity
2.
1. Assets : The term assets can be defined as economics resources which help to generate future
revenue and generate future cash flow. Fixed assets are meant to be hold for future economic
benefit and current assets are to be consumed within the operating cycle in the process of
generating revenue.

In the context of accounting assets are segmented as a) Fixed asset and b) Current asset

a) Fixed asset: Resources which are expected to keep providing benefit for more than one year
such as land, equipment, building etc.
b) Current asset: Resources which have an economic life of less the 1 year or one operating cycle
and to be consumed in the process of generating revenue or reducing expenses e.g. cash & Cash
equivalents, inventory, accounts receivable and prepaid expenses.

While recording transactions any addition in assets is debited while and reduction in its value
like depreciation is credited under double entry system

Assets are a good measure to calculate effectiveness of assets for generating revenue through
Return on Assets ratio

Return on Assets = Net Income / Avg. Total assets

2. Liability: The term can be defined are economic obligations of an organization to outsiders or
claim against its assets by outsiders i.e. debt. While recording the same in financial accounting
items like loan, accounts payable, deferred expenses, accrued expenses are part of liability.

Liability is of two kinds:

a) Current Liability or Short term liability: Current liabilities are the obligations of the firm to
be meet with in 1 year or one operating cycle whichever is higher e.g. Outstanding
expenses, Accounts payables and short-term loans are examples of current liabilities.
b) Long-Term Liability: These are the obligations of the firm which are due in more than one
year in the future. E.g Long-term loans , Bonds and Debentures, Deferred Tax liability etc.

While recording transactions any addition in liability is credited while and reduction in its value
debited is credited under double entry system
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Shantanu.Mishra@IESE.net
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 3. Owner’s Equity: It represents owner’s investment in the business. Owner’s equity is viewed as a
residual claim on the assets after meeting all the outside obligations e.g outside liabilities. In
case of corporates the Owner’s equity is of two types. Ordinary equity and Preferred equity.

Paid-in Capital is the amount of capital paid by the owner during stock issuance including par value
of share itself. It represents the funds raised by the business through issue of its own shares to
general public in case of Public companies and to relative or family members in case of private
companies.

Retained earnings refer to the portion of net income of a corporation retained by the corporation.
Retained earnings is the difference between Cumulative revenue and Cumulative expense.

Hence, Assets = Liabilities +Owner’s equity can be re-written as

Assets = Liabilities + (Paid-in Capital + Retained earnings)

Hence , Assets = Liabilities + (Paid-in Capital + (Cumulative revenue-Cumulative expense) )

While recording transaction below are the rules:

Owner’s equity = Any deduction will be debited while addition needs to be credited

4. Revenue: When an organization sells a service or product, they record revenue otherwise called
sales revenue, which is the increase in net assets resulting from selling products or services to a
customer. It is the gross revenue which will be subtracted to get net revenue.
Revenue is calculated by multiplying price of goods sold with total quantity sold .
Revenue can be divided into operating revenue and non-operating revenue.
Total capital generated through regular business operations will be reported under operating
revenue,
Any revenue which is not generated through primary operations will be reported under non-
operational revenue . They are non-predictable and non-recurring hence considered one off
time event
Investor will often consider revenue and later net revenue separately to determine the health of
business

5. Expense: It is an economic cost a business incurs through its operations to generate revenue. It
is an important indicator of business operations .

The expenses can be in form of

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Shantanu.Mishra@IESE.net
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 a) Cost of goods sold : This amount includes the cost of the material used in creating the goods
along with labor cost used to produce the good
b) Operating expenses: It is a category of expenditure that a business incurs as a result of
performing its normal operations . Salary payable to employees will be part of operating
expense, inventory bought, freight, etc

c) Depreciation/Amortization
d) Interest expense: Total interest amount paid against the loan. These expenses are directly
linked with status of liability. As these expenses happen they impact Cash and both Cash and
Liability goes down
e) Taxes: Total amount to be paid basis the net revenue. This amount once deducted from Net
Revenue after tax.

Shantanu Mishra
Shantanu.Mishra@IESE.net
Shantanu121282@gmail.com