Accounting

statements
 Presentation outline
 Accounting terminology
 The accounting equation and the trial balance
 Statement of comprehensive income (profit and loss account)
 Statement of financial position (balance sheet)
 Statement of cash flows
Accounting terminology
 Accounting terminology
• Accounting equation
• An equation showing the relationship among assets, liabilities, and owner’s equity
• Assets: what a business owns
• Equities: Financial rights to the assets of a business
• Equity of those to whom money is owed (liabilities owed to creditors)
• Liabilities: what a business owes (debts)
• Owner’s Equity:
• Amount remaining after the value of all liabilities is subtracted from the value of all assets
• The amount remaining after the value of all liabilities is subtracted from the value of all
assets
 Accounting terminology
• Transaction: business activity that changes assets, liabilities and/or owner’s
equity
• Capital account: the account used to summarize the owner’s equity in a
business
• Accounts Payable: account used whenever a business purchases assets on
account
• Liability account on the right side of accounting equation
• Increases on the right side
The accounting equation
 The accounting equation

• Assets = Liabilities + Owner’s Equity

• The equation must always be in balance
• Total of amounts on the left side must always equal the total
of the amounts on the right side
• Before a business starts, its accounting equation would show
all zeros
 The accounting equation
• Assets = Liabilities + Owner’s Equity + Revenue
• Revenue:
• An amount earned by performing services for customers or selling
goods to customers; it can be in the form of cash and/or accounts
receivable.
• A subdivision of owner’s equity: as revenue increases, owner’s equity
increases
 The accounting equation
• Assets + Accounts Receivables = Liabilities + Accounts Payable +
Owner’s Equity
• Accounts Payable:
• Amounts owed to creditors that result from the purchase of goods or services on
account: a liability.
• Accounts Receivable:
• An asset that indicates amounts owed by customers
The accounting equation assets =Liabilities
+ Owner's equity
Assets K’000 Liabilities K’000
Cash 4,125 Bank overdraft 13,000
Receivables 75 Payables 150
Equipment and tools 2,650 Owner’s equity
Motor vehicles 15,000 Share capital 8,000
Retained earnings 700
21,850 21,850
The trial balance
 The trial balance
• Trial Balance is a statement which is prepared by taking up all the account
balances on a particular date in order to verify the arithmetical accuracy of
the account in the ledger and putting the Debit in one side and Credit in
another
 Principle of trial balance

• Total debit entries = Total credit entries

• For each debit entry there is a credit entry.
• For each credit entry there is a debit entry
 Purpose/Objective of Trial Balance

• To have all balances of all the accounts of the ledger at one place.
• To have a check whether the transactions has been recorded by using
double entry principle
• To have arithmetic accuracy of other books of accounts because of the
agreement of the trial balance.
 Limitations of Trial balance
• Trial balance can be prepared only in the concerns where double entry
system of accounting is adopted.
• This system is very costly and cannot be adopted by small concerns
• It is not a conclusive proof and there may be chances of not entering entire
account or entering it twice by mistake
 Rules to prepare the Trial balance
total debit entries = Total credit entries
Debit Credit
•All Assets (Cash in hand, Cash at Bank, •All liabilities (Bank Overdraft, Secured
stocks, Land and Building, Plant and and unsecured loans, bills payable,
Machinery etc.) Outstanding Payables or expenses, Loan
•Sundry Debtors/receivables on mortgage etc.)
•Expenses (Carriage Inward, Freight, •Creditors
Rents, rebates and rates, Salary, •Reserve fund, general reserve, provision
Commission etc.) for depreciation, accumulated
•Purchases depreciation etc.,
•Losses (Depreciation, Return •Sales
inwards,  Bad debts etc.) •Gains (Discount received, Return
Outwards, Bad debts recovered, Profit and
loss A/c (Cr) etc.)
 Steps to prepare Trial balance

• The following are the steps to prepare Trial Balance.

• Step 1 Cast/ Balance all the ledger accounts in the books.
• Step 2 List all the Debit balances on the debit side and sum them up.
• Step 3 List all the Credit balances on the credit side and sum them up.
• The Trial Balance should Tally at Step 3.
Accounts Debit Credit
Cash 1,022,800 -
Accounts Receivable 75,000 -
Office Expenses 25,000 -
Prepaid Rent 6,000 -
Prepaid Insurance 1,200 -
Office furniture and 150,000 -
equipment
Bank loan - 150,000
Accounts Payable - 50,000
Unearned Revenues - 75,000
Capital - 1,000,000
Drawings 30,000 -
Commission Revenue - 125,000
Salary Expenses 90,000 -
Total 1,400,000 1,400,000
Accounting statements
 The basic accounting statements
• A basic set of financial statements should include:
• Statement of comprehensive income (profit or loss account) for the period
• Statement of financial position (Balance sheet) at the end of the period
• Statement of cash flows for the period
 Objective of accounting statements
• To provide information about the
• Financial position
• Financial performance
• Cash flows
• Of an entity that is useful to a wide range of users in making economic decisions
• Financial statements provide information about an entity's:
 Assets

Cash flows Liabilities

Contributions by and
distributions to owners Equity
Income and expenses,
including gains and
losses
 The Statement of Comprehensive Income
• It is a report showing the profit or loss from a firm’s operations over a given
period of time
• “How profitable is the business?
• Sales (revenue) – Expenses = Profits (income)
• Revenue from product or service sales
• Costs of producing product/service (cost of goods sold)

10–23
The Statement of Comprehensive Income
Sample Statement of Comprehensive Income for a given year
The Statement of Financial Position
(The balance sheet)
• It is a report showing a firm’s assets, liabilities, and owners’ equity at a
specific point in time
• Total Assets = Debt + Owner’s equity

10–26
The statement of financial position: An Overview
 The statement of financial position: Fixed
Assets
• Fixed Assets like plant, property and equipment
• Relatively permanent resources intended for use in the business (not for resale)
• Original cost of depreciable assets before any depreciation expense has
been taken

10–28
 The statement of financial position: Other
Assets
• Other Assets
• Assets other than current assets and fixed assets, such as patents, copyrights, and
goodwill that have an estimated value
• Current assets including cash, inventory and receivables

10–29
 The statement of financial position: Debt
• Debt
• Business financing provided by a creditor
• Current Debt (Short-Term Liabilities)
• Accounts payable: trade credit payable to suppliers
• Accrued expenses: short-term liabilities incurred but not paid
• Short-term notes: Cash amounts borrowed that must be repaid within a short period
of time
The statement of financial position: Debt
• Long-Term Debt
• Loans and mortgages with maturities greater than one year
• Mortgage
• A long-term loan from a creditor for which real estate is pledged as collateral.

10–31
 The statement of financial position: Debt

• Owners’ Equity
• Money that the owners invest in the business
• Owners are “residual owners” of the firm.
• Creditors have first claim on the assets of the firm.

10–32
 The statement of financial position: Types
of Financing
• Retained earnings
• Profits less withdrawals (dividends) over the life of the business
Owners’ Owners’ Cumulative Cumulative dividends
–
equity = investment + profits paid to owners

Owners’ Owners’ Earnings retained

equity = investment + within the business

10–33
Statement of cash flows
 Statement of Cash Flows
• It is a financial report showing a firm’s income (cash) when it is received
and expenses when they are paid.
• Cash flows from normal operations (operating activities)
• Cash flows related to the investment in or sale of assets (investment activities)
• Cash flows related to financing the firm (financing activities)

10–36
Major Classes of Cash Receipts and Payments
Usefulness of the Statement of Cash Flows

The information may help users assess the following aspects:

• The entity’s ability to generate future cash flows
• The entity’s ability to pay dividends and meet obligations
• The reasons as to why net income and net cash flow from operating
activities differ
• Cash and non-cash investing and financing activities during the year
 The Statement of Cash Flows
The cash flow statement provides information about:

• the cash receipts (cash inflows), and

• uses of cash (cash outflows) during the period
• Inflows and outflows are reported for:
• operating activities,
• investing activities
• financing activities during the period
Statement of Cash Flows: Concept
Operating
activities
inflows
Investing
activities

Financing
activities Cash
Pool Operating
activities
Investing
activities
outflows
Financing
activities
10–41
 Profits Versus Cash Flows
• Accrual-Basis Accounting
• Matches revenues when they are earned against the expenses associated
with those revenues.
• Sales reflect both cash and credit (noncash) sales.
• Inventory purchased on credit is a noncash expense.
• Depreciation is a noncash expense.
• Income tax is accrued and not entirely expensed.#
• Cash-Basis Accounting
• Reports transactions only when cash is received or a payment is made.
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 Reporting Significant Non-Cash
Transactions

• Transactions not involving cash inflows or cash outflows are

non-cash transactions.
• They are not reported in the body of the cash flow statement.
• If material, they are reported as notes to the statement or in a
supplementary schedule to the financial statements.
• Example: Issue of shares, exchange of a vehicle for purchase
of land.
Tutorials
• Lowani Ltd sold goods costing K100,000,000 for K120,000,000 on cash.
Which element / elements of the accounting equation will change due to
this transaction?
• (a) Assets only.
• (b) Assets and Capital
• (c) Capitals and liabilities
• (d) Assets and liabilities.
From the following account balances of Rosie Ltd as at
30 September 2022, produce a trial balance and a
statement of financial position
• Identify whether the following liabilities would be classified as current or non-
current as at the end of the reporting period and justify your classification
decision.
• Accrued expenses
• Bank loan with a clause in the contract that the loan was repayable on demand
• Provision for employee long service leave
• Trade payables
• Term loan with 10 monthly repayments remaining
• Gift cards that have not been redeemed
• Typical classifications of liabilities on the balance sheet include:
payables; interest-bearing liabilities; deferred tax liabilities; and provisions.
The equity classifications for large entities are:
• share capital; reserves; minority interests; and retained earnings. Categorise the
following items
• Other creditors
• Contributed capital
• Provision for warranty
• Revaluation surplus
• Bank overdraft
• Foreign currency translation reserve
• Secured bank loan
• Trade creditors
Which one of the following is not a component of financial statements?
(a) Statement of financial
position.
(b) Cash flow statement.
(c) Notes to the financial
statements.
(d) Chairman’s report.
• Outline some cash flow warning signals