Principles of Accounting

Financial Statements

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 Financial Statements

Uses Sources
Income Statement
Expenses Revenues

Balance N.Capital
Sheet
Assets
Liabilities

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 The balance sheet
• It is a “Where do we stand at the end of the period?”
type of report.
• This report is called the statement of financial
Position or, more commonly, the balance sheet.
• This report is prepared at a specific date: The date of
preparation is given in the header, or title, above this financial statement.
• A balance sheet shows two sides of the business, the
assets and sources of assets
 The balance sheet
• Assets: On one side of the balance sheet the assets of the
business are listed, which are the economic resources owned
and being used in the business. Some assets have been on the
books only a few weeks or a few months, so their reported
historical values are current. The values for other assets, on
the other hand, are their costs when they were acquired
many years ago.

• Sources of assets: On the other side of the balance sheet is a

breakdown of where the assets came from, or their sources.
– Assets come from two basically different sources: creditors and
owners. First, the creditors: which are the liabilities of a business.
Second the owners: Every business needs to have owners invest
capital (usually money) in the business. Also, businesses retain part or
all of the annual profits they make, and profit increases the total
assets of the business. The total of invested capital and retained profit
is called owners’ equity.
 The balance sheet
– Assets come from two basically different sources:
creditors and owners.

– First, the creditors: which are the liabilities of a

business.

– Second the owners: Every business needs to have

owners invest capital (usually money) in the
business. Also, businesses retain part or all of the
annual profits they make, and profit increases the
total assets of the business. The total of invested
capital and retained profit is called owners’
equity.
 Balance Sheet Forms

Account Format Report Format

• Side-by-side • Top and bottom
Assets on left  Assets on top
 Liabilities & Equity on right  Liabilities & Equity
on bottom

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Account Format Balance Sheet
Smart Touch /Sheena Bright
.

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 Any Compa ny
Cla s s ifie d Ba la nce S he e t
.
Ma y 31, 2010
As s e ts
Curre nt as s e ts :
Ca s h $ 4,800
Accounts re ce iva ble
S upplie s
2,500
200
.
Tota l curre nt a s s e ts 7,500
Plant as s e ts :
Furniture 18,000
Le s s : Accumula te d de pre cia tion (2,000) 16,000
Tota l a s s e ts $ 23,500
Liabilitie s
Curre nt liabilitie s :
Accounts pa ya ble 7,200
S a la rie s pa ya ble 100
Une a rne d re ve nue 400

Tota l lia bilitie s 7,700

S to c kho lde rs ' Equity
Common s tock 10,000
Re ta ine d e a rnings 5,800
Tota l s tockholde rs ' e quity 15,800
Tota l lia bilitie s & s tockholde rs ' e quity 23,500
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 Assets
Resources controlled by the
business that have
measurable value and are
expected to provide future
benefits to the company.

Cash Equipment

Supplies Furniture

McGraw-Hill/Irwin Slide 10
 Assets
Economic resources that will benefit the business
in the future. Assets are generally classified into
two main categories:

• Current Assets

• Fixed Assets

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 Operating Cycle
Cas
h
Collections Purchases

Receivables Inventories
Sale
s
 Current Assets
• Will be converted to cash, sold, or used up
during less than one accounting period
• Examples:
– Cash and cash equivalents
– Marketable securities
– Accounts receivable & Notes receivables
– inventory
– Prepaid expenses

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 Fixed Assets
• Acquired for use and not for resale
• 3 sub-categories:
– Property, plant & equipment “Tangible assets”
• Land, Building, Furniture, Equipment
– Long-term financial investments
– Intangible assets “Good will”

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 Assets Resources
• Liabilities • Owners’ equity
– Debts payable to outsiders – Owners’ claims to the
– Examples: assets of the business
• Accounts payable – In a corporation,
• Notes payable stockholders’ equity
• Bank loans

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 Liabilities

Amounts owed by
the business to
creditors.

Notes Accounts
Payable Payable

McGraw-Hill/Irwin Slide 16
 Liabilities
A debt (something owed)

• Current Liabilities
• Long-term Liabilities

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 Current Liabilities
• Must be paid either with cash or goods &
services within less than one year
• Examples:
– Accounts payable
– Notes payable due within one year
– Salary payable
– Interest payable
– Unearned revenue

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 Long-Term Liabilities
• Are not due within the current year
• Examples:
– Notes payable with due dates over one year
– Bonds
– Long term loans

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 Owner’s Equity

Owner’s claim to the

business resources.

Ownership Profits

McGraw-Hill/Irwin Slide 20
 Equity
Owner’s equity (Sole Stockholder’s equity
trader, partnership) (corporation)
Common stock Capital
+ Retained earnings + Retained earnings
+ Net Income + Net Income
- Dividends - withdraws

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 Keywords in an account title
Accounts with Receivable in the title are always Assets, they
represent amounts owed to the business by customers and
others.
Accounts with Payable in the title are always Liabilities, they
represent amounts owed by the company to others to be
paid in the future.
Accounts with Prepaid in the title is an Asset, because it
represents amounts paid to others for future benefits, such
as Insurance coverage and property rentals.
Accounts with Unearned in the title are always Liabilities
that represent amounts paid to the company in the past by
others who expect to receive goods ore services from the
company in future.
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 Working Capital
The difference between current assets
and the current liabilities.
A basic measure of a company's ability
to pay its current obligations.
The more working capital a business
has, the less risky it is.
.

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 Operating Cycle
Purchase good and
services

Typical
Operating Cycle
Receive
cash from Pay cash
customers to suppliers

Sell goods and services

to customers
Slide 26
 The income statement
• The income statement is the all-important financial
statement that summarizes the profit-making
activities of a business over a period of time.
• The income statement summarizes the inflow from
sales revenue and income, which is offset by the
outflows for the expense during the period.
• Deducting expenses from revenue and income leads
down to the bottom line, which is the final net profit
or loss for the period and is called net income or net
loss
Single step Income Statement
 Revenues
• Amounts earned by delivering goods or
services to customers
– Sales revenue
– Service revenue
– Interest revenue
– Dividend revenue

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 Expenses
• Outflows of assets or increasing liabilities in the
course of delivering goods or services to customers
– Cost of goods sold
– Operating expenses:
• Depreciation
• Selling expense
• General and administrative expenses:
• Rent expense
• Utilities expense
– Interest expense
– Income taxe expenses 30
Accrual Basis Accounting

Revenues are recognized

when they are earned and
expenses are recognized
GAAP when they are incurred,
regardless of the timing of
cash receipts or
payments.

Slide 31
 Income Statement Formats

Single-step Multi-step
Groups all revenue Lists several

and all expenses important subtotals

Gross profit
together
No subtotals Operating income

Works well for More popular

service companies

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 Income Statement Accounts
Revenues are earned when PIZZA AROMA
there is an exchange of a Income Statement
business’s products or For the Month Ended May 31, 2009
services for cash or a promise Revenues
to pay cash. Sales revenue $ 11,000
Total revenue 11,000
Expenses
Expenses are costs incurred to
Supplies expense 4,000
generate revenues.
Wages expense 2,000
Rent expense 2,000
Utilities expense 600
Insurance expense 300
Advertising expense 100
Total expenses 9,000
Net income is the excess of Net income $ 2,000
revenues over expenses.

Slide 33
Multi step Income Statement
.
 Multi step Income Statement
Gross profit
Sales Cost of goods sold

Operating income (EBIT)

Gross profit Operating expenses

Net income before taxes

Operating income Other revenues and gains Other expenses and losses

”Net income “the bottom line

Net income before taxes Income taxes paid out