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Accounting numbers are the basic elements of Financial Language – a language that
even non-financial directors must speak.

Imagine going to a country where you don’t understand the local language!

It’s the same when you do business without understanding what the financial info
given is telling you!

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Accounting is an INFORMATION SYSTEM that provides REPORTS to users about the
economic activities and CONDITION OF A BUSINESS

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Balance Sheet : Snapshot of an entity at a particular point of time
Statement of Owner’s Equity : Snapshot of owner’s investment and reinvestment
from profit
Income statement : Operation activities transactions throughout a period (usually a
year)
Cash Flow Statement : All transactions involving cash inflow or outflow throughout a
period (usually a year)

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Balance Sheet
Provides information about value of the company at a particular point of time
Basic components of Balance Sheet are:
Assets = Fixed Assets + Current Assets
Liabilities = Current Liabilities + Long Term Liabilities
Equity = Shareholder Equity + Reserve + Accumulated Profit
Statement of Owner’s Equity
Provide information about how much owner have invested in the company and how
much profit were kept and reinvested in the company
Basic components of statement of Owner’s Equity are:
Owner’s equity = Owner’s contribution – Owner’s withdrawal
Reserve = Accumulated Profit

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Scenario 2:
Now that potential investor knows the value of your company, she wants to know
what has happened since 1st January 2016 to 31st December 2016?

Profit/ Loss Statement

Provides information about profitability for a particular period (usually a
year)
Basic components of Income Statement are:
Revenue (Sales/ Income)
Expenses = cost of sales + marketing cost + administration cost +
other overhead cost + GST
Profit/ Loss
Income Tax

Cash Flow Statement

Provides information about cash receipts and cash payments
Basic components of Cash Flow Statement are:

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Cash Flow from Operating activities = receipts from customers –
payments for operation activities
Cash Flow from Investing activities = receipts from investment –
payments for investing activities
Cash Flow from Financing activities = owner contribution + loan
receipt – owner withdrawal – loan repayment

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Cash In Flow & Cash Out Flow

Sales invoice you might make a lot of sales and may make a lot of profit, however
it does not mean that you will be cash rich due to poor collection, which increases
the chance of you winding up you business.

Purchase invoice you may push back your payments to have more cash in hand,
however, you may increase your liability risk, which also may result in business failure

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