By;Assad sarobi lecture at salam university

Basic Financial
Statement

Chapter No 2
 FINANCIAL STATEMENT

A declaration of information believed to be

true communicated in terms of money.

Income Statement
Statement of Owner’s Equity
Balance Sheet
Cash Flow Statement
 BALANCE SHEET
Balance sheet shows the financial position of the
business at a specific date.
In Balance Sheet we are concerned with three
things:

Assets
Liabilities
Owners Equity
 TYPES OF ACCOUNTS
1 Assets

2 Owner’s Equity

3 Liability

4 Expenses

5 Revenues
 ASSETS

Any thing of value that possess by a business which

benefit business in future ,whether Tangible or Intangible.
OR
Any Valuable thing possessed by a firm with the
following three features qualifies as assets.
 The legal title of ownership
 Right to use
 Right to sale
 TYPE OF ASSETS

Depreciable Assets
Fixed Assets
Non-Depreciable Assets
Current Assets
Intangible Assets
 TYPES OF ASSETS
 Current Assets:-
Which are either Cash or easily convertible into cash.
Examples:- Cash, Bank, Account Receivable, Note
Receivables etc.
 Fixed Or Plant Assets:-
These assets are acquired to retain and use in business
operation for more than one year.
Examples:- Building, Furniture, Plant & Machinery,
Vehicles, Land, Tools & Equipment etc.
 Intangible Assets:-
The assets which are not physically available , but still
valuable for business enterprise etc.
Examples:- Preliminary Expense, Trade Mark, Good will.
 EQUITIES

The rights possessed by owners or outsiders

against the assets of organization is called
equity.
The equities are divided into two categories.
 OWNER EQUITY
 LIABILITY
 OWNER EQUITY

 It is the capital invested by the proprietors/owners

of the business. It is the claim of the owners on the
assets of the business organization. It is also called
internal equities or owners fund.
 Example:- Capital
 LIABILITIES

 It is the claim of the outsiders against the

assets of the business. The liabilities also
called external equities.
 TYPES OF LIABILITIES

Short Term Liability Long Term Liability

Accounts Payables Bank Long term

Notes Payable Loan
 Outstanding
Expense
Bank Overdraft. Mortgage
 TYPES OF LIABILITIES
 Short Term Liability:-
 The liabilities which are payable in near future (within
one year) are called as short term or current liabilities.
 Examples:- Accounts Payables, Notes Payable,
Outstanding Expense, Bank Overdraft.
 Long Term Liability:-
 Those liabilities which are not payable in near future date
(More than 1 Year).
 Examples:- Bank long term loans, Mortgage
 Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash $ 22,500 Liabilities:
Notes receivable 10,000 Notes payable $ 41,000
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities $ 80,000
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000
 INCOME STATEMENT

Income Statement shows the profit and loss,

performance of the business for the period
ended.

Revenue

Expense
 EXPENSE

 Cost of doing a business is called an expense.

 Or
Expenses are transactions involving the
outflow of assets in order to generate revenue.
 REVENUE
All sort of income received or accrued is
called as revenue. This revenue may be earn
from sale of merchandise or by rendering
services for the customer.
 Examples:- Sales, Services Rendering,
Discount Received, Commission Received,
Interest Received.
Revenue:
Fee Earned $ 10000
Less Expenses:
Salaries Expense $ 4000
Rent Expense $ 2000
Utilities Expense $ 1000 ( 7000)
Net Income $ 3000
 ACCOUNTING EQUATION
Assets and Equities are the basic Elements of Accounting. we can
express these Elements by an equation known as Accounting Equation
Assets = Equities OR Assets = Liabilities + Owner Equity
Every transaction effects one or more Elements of Accounting(Assets
and Equities) e.g. if the machinery is purchased for cash.

Assets(Machinery) = Assets (Cash)

If the machinery is purchased on credit(loan) basis

Then Assets = Liability of outsider

Elements of Accounting may b expressed in + or -

 EXAMPLE OF
ASSETS LIABILITIES AND OWNER’S EQUITY

If a vegetable shop has total value of assets equal to

$1000 and owner invest $600 from his own pocket and
the remaining $400 he acquire from his friend who is not
owner of the business and invest in the business.

So here $1000 is the value of the assets of business $400

is the liability and $600 is owner equity’s.
TRANSACTION EFFECT EXPLANATION
Purchased machinery Assets(machinery) + Money was exchanged
for cash 20000 for Machinery
Assets(cash) _

Paid wages in cash 300 Assets (cash) _ Money was exchanged

Owner Equity (wage) for services
_
Borrowed cash 5000 Assets(cash) + A liability as a/c
from bank payable increased in
Liability out siders + exchange of money
Show the effect of the following transactions with the help of
Accounting Equation.

1.Started business with capital of afs.100,000

2.Purchased building for afs.30,000
3.Purchased stationery for office for cash afs.500
4. Paid telephone bill afs.200
5. Purchase tools & equipments for afs.20,000 in
which afs 10,000 on cash and afs 10,000 A/P.
 ASSET = Owner’s Equity + Liabilities

Cash + Building + Tools & Equipments Capital + A/P

Jan1 100,000 100,000
Balance 100,000 100,000

Jan 5 (30,000) 30,000

Balance 70,000 30,000

Jan 8 (500) (500)

Balance 69,500 99,500

Jan 11 ( 200) (200)

Balance 69,300 99,300

Jan 15 (10,000) _______ 20,000 10,000

Balance 59,300 30,000 20,000 99,300 10,000
 Show the effect of the following transaction by
means of Accounting Equation. Exp-1
 Asim started a business by introducing capital afs 200,000.
 Purchased building for cash afs 100,000.
 Purchased merchandise on account(credit) afs 50,000.
 Expenses paid 1000
 Asim drawings afs 200
 Purchased machinery for cash 70,000 afs.
GIVE EFFECT OF THESE TRANSACTIONS ON
ELEMENTS OF ACCOUNTING . Exp-2

 Umair started a business with cash afs 20,000

 Purchased equipments for 3000 cash.
 Purchased merchandise from Ahmed for 5000afs
on credit basis.
 Paid utility bills 1000afs.
 Paid cash to Ahmed 2000afs.
 SHOW THE EFFECT OF FOLLOWING
TRANSACTION ON ACCOUNTING EQUATION. Exp-3

 Imran started a business with cash 500,000

 Purchased goods on credit basis from Ahmad for 100,000
 Paid transportation expenses 25,000
 Purchased machinery on account 10,000 from Asim.
 Imran’s drawings 5000
 Goods are sold on credit basis to Ali for 15,000
 Paid cash to Ahmad 60,000.
 Exp- 4

 Razak started business with cash $ 200,000.

 He purchased building for $ 50,000 on cash.
 He purchased Machinery for $ 20,000 cash.
 Purchased merchandise for $ 10,000 on credit.
 Paid rent for $ 5000.
 Paid Office Equipment for $ 30,000 in which $10,000 in
cash and remaining is payable.
 Exp-5

Jan01. Naqeeb started business with cash $60,000.

Jan 05. He took $ 40,000 loan from a bank.
Feb 02. He purchased Equipment with cash $ 25000.
Feb10. Naqeeb purchased merchandise from Jawad on credit
$30,000.
Feb 15. Naqeeb sold merchandise of $35,000 which he purchased on
$25000.
Mar03. He purchased machinery of $40,000 in which $10,000
payable .
Marc15. Naqeeb paid $20,000 to Jawad.
 Exp-6

Mar 1- Saleem started business with cash $150,000.

Mar 2- He purchased building with $100,000 cash.
Mar 13- He purchased Goods from Imran of $30,000 in
which $15000 cash and $15000 payable.
Mar 24- He sold goods of $ 25,000 which costs $ 30,000.
Mar 25- Purchased furniture of $ 30,000 in which $10,000 is
still payable.
April 3- Saleem took loan from bank $40,000
April 10- Paid $ 15,000 to Imran.
 Exp-7

Jan01. Kamran started business with cash $ 70,000.

Jan03. He purchased furniture for $ 25,000 for cash.
Jan07. Kamran purchased inventory 25000 from saleem.
Jan11. He paid electricity bill of $3000.
Jan 15. He take loan of $ 15000 from kabul bank.
Jan21. He sold inventory of $ 15000,which cost $12000.
Jan23. Kamran paid $ 15000 to saleem.
Jan27. Kamran sold inventory of $ 8000 which cost
$10,000.