Asset= Liabilities + Owners Equity

There are four types of Asset

Current Asset: These are assets that are expected to be converted into cash or used up within one year
or one operating cycle, whichever is longer.

Examples:

Cash, Cash equivalents, Accounts receivable, Stock inventory, Marketable securities, Pre-paid liabilities

Long Term Asset: These are assets that are expected to be held for more than one year and are not
intended for sale in the ordinary course of business.

Examples:

Long-term investments, Property, plant, and equipment (PP&E), Investment properties, Natural
resources

Plant, Machineries: These are specific types of long-term assets that are used in the production or
supply of goods and services.

Examples:

Manufacturing equipment, Office equipment, Infrastructure

Intangible Asset: These are assets that lack physical substance but have value to the company due to
legal or contractual rights, or because they contribute to the company's ability to generate future
revenues.

Examples:

Intellectual property, Goodwill, Brand recognition

There is also liabilities like

Accounts Payable: These are amounts owed by a company to its suppliers or vendors for goods or
services purchased on credit. Accounts payable typically arise from the normal course of business
operations.

Loans Payable: These are amounts owed by a company to creditors or financial institutions as a result of
borrowing money. Loans payable typically involve formal agreements outlining repayment terms,
including interest rates and repayment schedules.

Owners Equity consist of two things, Shareholders Capital + Retained Earnings

and we know
Retained earning = Revenue-Expense-Dividend
# Income Statement

The income statement is a financial document that provides a summary of a company's revenues,
expenses, and profits over a specific period of time, typically a month, quarter, or year. It is a
measurement tool for a company’s success. It has other names such as statement of income or
statement of earnings.

We use it to measure a company’s profitability, investment value and creditworthiness. Creditors look at
the income statement of a company to evaluate and make decision if they want to credit the business or
not. We can also learn profit figure, timing and uncertainty of future cash flow. A good income
statement can attract investors and vice versa.

#Usefulness of Income Statement

The income statement is a valuable tool for understanding a company's financial health and predicting
its future success. Here's a simple breakdown of how it's useful:

1) Evaluating Past Performance: By looking at a company's revenues and expenses over a specific
period, like a year, investors and creditors can see how well the company has been doing. This helps
them compare the company's performance to its competitors and assess its strengths and
weaknesses.

2) Predicting Future Performance: Examining past performance helps identify trends. If a company has
been consistently growing its revenues or managing its expenses well, it suggests that these trends
might continue into the future. This information is crucial for investors and creditors when making
decisions about whether to invest in or lend to the company.

3) Assessing Risk and Uncertainty: The income statement provides insights into the various factors that
contribute to a company's income, such as revenues, expenses, gains, and losses. Understanding
these components helps stakeholders assess the risks associated with achieving future cash flows.
For instance, if a company heavily relies on a single source of revenue, it might be riskier compared
to a company with more diversified income streams.
#Limitation of Income Statement

1) There are various items which cannot be measured reliably. Companies tend to ignore those
items even though the item have a great impact on income. These items are called unrealized
gain and we don’t include it in income statement

2) Different companies may use different accounting methods, such as depreciation methods. For
example, one company might use straight-line depreciation while another might use accelerated
depreciation. These differences can make it challenging to compare the financial performance of
companies accurately since the methods used can affect the reported income differently.

3) Determining income involves subjective judgment, particularly when estimating the useful life of
assets. For instance, two companies might have the same asset, but if they estimate different
lifetimes for it, their reported incomes could differ even if their actual financial performance is
similar.

# Elements of Income Statement

1) Revenue, Expense, Gain, and Loss Transactions, these are the main components included in the
income statement.

Revenue: This is the money a company earns from selling its products or services. It's the primary source
of income.

Expense: These are the costs incurred by the company in its day-to-day operations. They include things
like salaries, rent, utilities, and materials.

Gain: Gains are increases in assets or decreases in liabilities from peripheral transactions, not related to
the company's primary activities. For example, selling equipment for more than its book value would
result in a gain.

Loss: Losses are decreases in assets or increases in liabilities from peripheral transactions. For instance,
selling equipment for less than its book value would result in a loss.

2) Effects on Financial Accounts:

Income Increase:

When a company's income increases, it means the company is generating more revenue from its
operations. This higher income has specific effects on the company's financial accounts:

Increase in Assets and Decrease in Liabilities: Increased income usually leads to a higher net profit,
which, in turn, can increase the company's cash reserves (an asset) or decrease its liabilities if the
company uses profits to pay off debts.

Increase in Equity: As income contributes to the company's net profit, it also increases the company's
equity. Equity represents the owner's interest in the assets of the company. When income increases, the
company's overall value and wealth increase, leading to higher equity.
 3) Effects of Expenses:

Expense Increase:

When a company's expenses increase, it means the company is spending more money on its operations.
This higher expenditure has specific effects on the company's financial accounts:

Decrease in Assets and Increase in Liabilities: Increased expenses often result in lower net profit, which
can lead to a decrease in the company's cash reserves (an asset) and an increase in its liabilities if the
company needs to borrow money to cover the additional expenses.

Decrease in Equity: Since expenses reduce the company's profitability, they also decrease the
company's equity. Higher expenses mean lower net income, which translates to lower overall company
value and wealth, resulting in a decrease in equity.

Income Statement (Format)

1) Sales/Revenue: Sale in cash cause asset to increase. If we sell service then it is service revenue.
Total sale – sales discounts – sales allowances and returns = Net Sale
2) Cost of good sold
3) Gross profit
4) Selling Expenses
5) Administrative expenses
6) Other income and Expenses: Not included in GAP but included in IFRS. To lower the value of
asset other incomes are positive and other expenses are negative
7) Income from operation
8) Financing Cost: Interest Expense
9) Income before income tax
10) Income Tax
11) Income from continuing operation
12) Discontinued Operations
13) Net Income
14) Non controlling Interests
15) EPS