-Accounting Terms

-Principal Financial Statements

Week 2
The major financial statements – an
overview

Income Statement

Statement of Financial
Position (Balance Sheet)

Statement of Cash Flows

◦ Previously known as Profit & Loss Account and in
some accounts may still be referred to as the
‘Statement of Profit or Loss’

◦ The Income Statement records the income and

expenses of an entity (i.e the performance of the
entity) over a certain period of time, year, quarter
or month.
 Records the assets, liabilities and capital of the
entity at a particular point in time – i.e. what the
business owns and what it owes

 Note the Income statement records the results over

a period of time , say a year, whereas

 The Balance Sheet records the position at a

particular point in time, - at a certain date and
time.
◦ Revenue/Sales Revenue
 The revenue earned by the business. This will
mostly come from the sales of the business, i.e.
goods sold or services provided

◦ Cost of Sales
 The cost of the goods which have been sold
 Generally won’t be relevant if a service industry
e.g. a veterinary practice, dog grooming
business, airline, accounting firm.
◦ Operating Expenses
(often split into two main categories of Distribution expenses
and Administration expenses)
 Costs incurred in the running of the business: salaries rent,
insurance, light and heat, stationery, promotions, expenses
specific to an industry, e.g. animal vaccines, animal
shampoo, fuel for airlines

◦ Other Gains/Losses
 Items not derived from the main trading of the business,
e.g. redundancy payments, restructuring costs, losses on
revaluation assets

◦ Finance gains/losses
 Interest charges related to the finance of the business, or
interest received from deposits held.
 Measuring profit

Profit Total revenue for the period

(or loss)
for the
= less
Cost of sales & total expenses incurred in
period generating that revenue
Example Income Statement for the year ended 31/12/2022

Sales revenue
less
Cost of sales
equals
Gross profit
less
Operating expenses
equals
Operating profit
plus/minus
Other gains/losses
plus/minus
Finance gains/expenses
equals
Profit before tax
Uses of the Income Statement

Helps in providing information on:

How effective the business has

been in generating wealth

How the profit was derived

Balance Sheet (Statement of Financial Position)

Assets = Equity + Liabilities

Which can be extended as follows:

Profit (or
Assets = Equity + minus loss) + Liabilities

Always shown vertically

 Assets: Resources of the business which are
capable of providing future benefits and which can
be measured in monetary terms

The classification of assets is

split into two categories:

Current Assets

Non-Current Assets
 Current Assets

Held for sale or consumption during

the business’s operating cycle

Expected to be sold within

the next year

Held principally for trading

They are cash or near

equivalents to cash
 Current Asset examples:

◦ Inventory (Stock)

◦ Accounts Receivable (i.e. Debtors, Trade + other)

◦ Other Current Assets (i.e Prepayments & Short-

Term Investments)

◦ Cash and Cash equivalents (Bank & Cash

balances)
The circulating nature of current assets as
inventory is sold

Inventories
(stock)

Trade
Cash receivables
(trade debtors)
 Non-Current Assets

Other assets that do not meet the

definition of current assets
 Examples of non-current assets

◦ (i) Property, Plant &Equipment

 Land & Buildings
 Plant & Machinery
 Fixtures & Fittings, Equipment
 Motor Vehicles

◦ (ii) Intangible
 Patents, Trademarks, Brand names, Goodwill
 (if these have arisen as a result of a monetary
transaction)

◦ (iii) Financial
 Investments (shares in other companies)
 Non-Current (Fixed) Assets
+
Current Assets
=
Total Assets

Total Assets represent one side (top half) of the

Statement of Financial Position
(or left side of the accounting equation)
Example Balance Sheet as at 31st December 2022
£000
ASSETS:
Non-Current Assets:
Property, Plant and equipment 45
Intangible Assets 30
Financial Assets 19
94
Current Assets:
Inventories 23
Trade receivables 18
Cash at bank 12
53
Total Assets 147
(The above is the top half of Balance Sheet/
Statement of Financial Position (SoFP))
 All assets have been financed in some way, either by:
(a) Equity (Capital financing provided by the
owners + profits - losses)
and
(b) Liabilities (loans + other)

In total the Equity and Liabilities represent the other side (bottom
half) of the Statement of Financial Position
(or right side of the accounting equation)
 (a) Equity

◦ If form of business is a sole trader or partnership

this is the initial money that has been invested by
the owner/s is know as the capital

◦ If a form of business is a company it represents

the initial money that has been invested in the
company through the buying of shares: the share
capital

◦ The business is regarded as an independent

entity, and this in effect owes the owner/s for the
money that has been invested in it
 Profits
◦ Any profits that are made belong to the owners will
increase the owners stake in the business (and any
losses will reduce the it)

◦ Any profits will either be kept in the business for

expansion or distributed to the owners
 In a company profits kept in the business for
expansion are known as Retained Reserves/Retained
Profits/Retained Earnings

 Profits may also be set aside in a ‘Reserve’ for

specific purposes e.g redundancy payments expected
to occur
 (b) Liabilities – Financial obligations of the business
to people or firms outside the business

Current liabilities

Non-current liabilities
 Current Liabilities

Expected to be settled within the

business’s normal operating cycle

Held principally for trading

purposes

Due to be settled within a year after

the statement of financial position
date

No right to defer settlement beyond

a year after the statement of
financial position date
 Current Liabilities examples
◦ Trade payables (creditors)
◦ Taxation due (less than12 mths)
◦ Other payables/Sundry creditors
◦ Bank Overdrafts, Short term borrowings + current
portion of long term borrowings
Non-Current Liabilities

Other liabilities that do not meet

the definition of current liabilities
 Non-Current Liabilities examples:
◦ Long Term Loans
◦ Bonds/Debentures (in a company)
 Equity
(Initial capital invested + retained profits or less any losses)
+
Non-Current Liabilities
+
Current Liabilities
=
Total Equity & Liabilities

Total Equity & Liabilities represent the other side/half

of the Statement of Financial position
Total Assets must equal Total Equity & Liabilities i.e
the SoFP must ‘Balance’
 Example
Statement of Financial Position as at 31st December 2022
(Continued)

£000
EQUITY AND LIABILITIES:
Equity (capital invested + profits – losses) 60

Non-Current Liabilities:
Long-term borrowings 50
Current Liabilities:
Trade payables 37
Total Equity and Liabilities 147
(The above is the bottom half of Balance Sheet/ Statement
of Financial Position (SoFP))
Example Balance Sheet as at 31st December 2022
£000
ASSETS:
Non-Current Assets:
Property, Plant and equipment 45
Intangible Assets 30
Financial Assets 19
94
Current Assets:
Inventories 23
Trade receivables 18
Cash at bank 12
53
Total Assets 147
(The above is the top half of Balance Sheet/
Statement of Financial Position (SoFP))
 Example
Statement of Financial Position as at 31st December 2022
(Continued)
£000
EQUITY AND LIABILITIES:
Equity (capital invested + profits – losses) 60

Non-Current Liabilities:
Long-term borrowings 50
Current Liabilities:
Trade payables 37
Total Equity and Liabilities 147
(The above is the bottom half of Balance Sheet/ Statement
of Financial Position (SoFP))