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July 19, 2012




This memorandum is intended for the purpose of explaining to Miss Alma De La Fuente
the usage or purpose of different Financial Statements including (Income Statements,
Statement of Changes in Equity, and Statement of Financial Position) and how they relate with
another financial statement. In order to know or learn the relationship and purpose of the
financial statements, one should learn about the brief definition of accounting, history of
accounting, accounting elements, parts and particularly the purpose of each financial
To handle the particular concern of understanding the purpose and relationship of the
different financial statements, Mister Aldous Gabriel L. Cajudo, her friend is responsible for
providing recommendations and explanations for a better comprehension of the different types
of financial statements. Such recommendations are the following: brief introduction of the
history of accounting, accounting definition, introducing the different accounting elements,
identifying the parts of a particular financial statement, and lastly, the reason and point of
preparing a specific financial statement.
First, before the introduction of financial statements, a brief background or history of
accounting is needed. Wherein, accounting a rose in order to record information. Accounting
was developed as a result of the informational needs of merchants in the city states of Italy
during the 1400s. Accounting was also used to keep track of the cost of labour and materials of
some civilizations like China, Babylonia, Greece and Egypt to build legendary structures like the
Great Pyramids. The growth of Corporations spurred the development of accounting.
Accounting also supplied the concept of income. Due to globalization, more and better
accounting information are now required and must evolve into a more efficient level being the
means used in communicating business and financial information.
A succinct definition of accounting could be accounting is a service activity.
Accountings function is to provide quantitative information, primarily financial in nature, about

Ms. Alma De La Fuente

July 19, 2012
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economic entities that is intended to be useful in making economic decisions, and as the
language of the business, the fundamental objective of Accounting is communication since it
serves as the link between the outside world and the business through the financial
statements. Think of it as the bridge connecting both ends. With this information, we can
conclude that accounting and financial statements are interrelated and accounting is part of a
business or anything that involves economic entities, so financial statements are also connected
to business and economic entities.
There are different types of financial statements but in this memorandum, only three
financial statements are going to be discussed namely, income statement, statement of
changes in equity (SOCiEty), and Statement of Financial Position. All these financial
statements are composed of different accounting elements.

Assets- Assets are resources controlled by the entity as a result of past transactions which
future economic benefits are expected to flow the entity. May be tangible or in the form of
claims and rights. What you OWN

Liabilities- debts or obligations of the business. paid in cash or non-cash assets or settled
by rendering some services. What you OWE

Owners Equity (Capital) - residual claim of owner in assets of the business after
satisfying the claims of the creditors. What you are WORTH

-financial statement that presents the Revenues (INCOME), Expense, Net Income/Net
Loss in a given period of time. Determines whether there is a Net Loss or Net Income

Parts of Income Statement

Heading- composed of NAME of Business entity, KIND of financial statement prepared and
in this case it is an Income Statement, PERIOD covered by the financial
statement and an example of this would be For The Year Ended May 1, 2012

Ms. Alma De La Fuente

July 19, 2012
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Body- lists the Revenues and Expenses and the difference between them which is either a
Net loss or Net Income
-Financial statement that shows the changes in the owners equity over a given
period of time. It also shows what happened in a capital account. Needs the Income
Statement to compute for the Ending Capital balance.

Parts of SoCiEty
Heading- composed of NAME of Business entity, KIND of financial statement prepared
,PERIOD covered by the financial statement
Body-presents the beginning and ending capital balance, additional investment, net income
or loss, withdrawal by owner.


- Financial statement that shows the level of Assets, Liabilities and Owners
Equity. Needs the SoCiEty in order to balance the total Assets, Liabilities and Owners Equity

Parts of Statement of Financial Position

Heading- composed of NAME of Business entity, KIND of financial statement prepared
,Date of the financial statement e.g. May 1,2012
Body- where the 3 accounting elements (assets, liabilities, and owners equity) are