Financial Accounting

Financial Statements
• Statement of Financial Performance
- Income Statement
- Profit & Loss (P & L)
• Statement of Financial Position
- Balance Sheet
• Statement of Movements in Equity
• Statement of Cash Flows
 Components of the Statements
• Income Statement
- Revenue / Income
- Expenses / Costs

• Balance Sheet
- Assets
- Liabilities
- Owners Equity / Equity
Residential Rental Ltd Residential Rental Ltd
Income Statement Balance Sheet
For the year ending 31 March 2020 As at 31 March 2020

Revenue Assets
Rental Income 19,720 Bank Account 3,015
Interest Received 235 Accounts Receivable 180 *1 tenant, 2 weeks rent
Total Revenue 19,955 Rental Property 350,000
Total Assets 353,195
Expenses
Accounting fees 300
Liabilities
Advertising 100
Accounts Payable 390 *Accounting fees, 1 month phone bill
Depreciation 5,110
Loan 263,000
Insurance 1,230
Total liabilities 263,390
Interest Expense 6,360
Legal fees 150
Phone charges 1,080 Net Assets 89,805
Repairs and Maintenance 1,320
Rates 3,200 Equity
Travel costs Owners Capital 86,500
Total Expenses 18,850 Accumulated Profits 2,200
Current year net profit 1,105
Net Income 1,105 Total Equity 89,805
 The Accounting Equation & Double-Entry
Accounting
Balance Sheet
• A = L + OE
(Assets = Liabilities + Owners Equity)
OR
• A – L = OE
(Assets – Liabilities = Owners Equity)
Exercise 1
1. Name what component and statement the following accounts come
under:
- Insurance ($2,680)
- Sales ($10,130)
- Furniture ($3,500)
- Interest received ($500)
- Stock / Inventory ($1,200)
- Bank Loan ($3,000)
- Phone & internet charges ($1,530)
2. Using the accounting equation, calculate what the owners equity is.
 Debits, Credits & Double entry
The extended accounting equation to include the income statement
components is:
Assets + Expenses = Liabilities + Owner’s Equity + Revenue

DEBITS (DR) CREDITS (CR)

Assets Liabilities
Expenses Owners Equity
Revenue
Residential Rental Ltd Residential Rental Ltd
Income Statement Balance Sheet
For the year ending 31 March 2020 As at 31 March 2020

Revenue Assets
Rental Income 19,720 Bank Account 3,015
Interest Received 235 Accounts Receivable 180 *1 tenant, 2 weeks rent
Total Revenue 19,955 Rental Property 350,000
Total Assets 353,195
Expenses
Accounting fees 300
Liabilities
Advertising 100
Accounts Payable 390 *Accounting fees, 1 month phone bill
Depreciation 5,110
Loan 263,000
Insurance 1,230
Total liabilities 263,390
Interest Expense 6,360
Legal fees 150
Phone charges 1,080 Net Assets 89,805
Repairs and Maintenance 1,320
Rates 3,200 Equity
Travel costs Owners Capital 86,500
Total Expenses 18,850 Accumulated Profits 2,200
Current year net profit 1,105
Net Income 1,105 Total Equity 89,805
Exercise 2
• Note whether the following should be a debit or credit:
- To increase a bank account
- To increase sales income
- To decrease a loan
- To decrease the value of some machinery
- To increase wages cost
- To increase amounts owed to suppliers
- To decrease rates cost
- To increase the amount the owners have put in the business
 DEBITS & CREDITS

DEBITS (DR) CREDITS (CR)

• Increase Assets
• Increase Expenses
• Decrease Liabilities
• Decrease Equity
• Decrease Revenue
• Increase Liabilities
• Increase Equity
• Increase Revenue
• Decrease Assets
• Decrease Expenses
 Double Entry - General Journals
• Every transaction causes two impacts on the financial statements.
• A general journal is used to record the two impacts (via Debits and Credits) and ensure they
balance in the accounting equation.
Journal # Date Account # Account Name Debit Credit
1 28/02/2020 230 Rates expense 90
600 Bank Account 90
(To record payment of rates)

2 5/03/2020 600 Bank Account 210

190 Sales 210
(To record cash sales received)

3 20/03/2020 600 Bank Account 2,000

730 Bank Loan 2,000
(To record borrowing funds from the bank)

Totals Check 2,300 2,300

Exercise 3
• Prepare general journals for the following March 2020 transactions in
Sam’s new café business:
- On the 18th Sam put $2,000 personal funds into the business bank account
- On the 23rd Sam bought $850 of food & drinks
- On the 24th Sam bought a coffee machine for $945
- On the 25th Sam borrowed $2,000 from the bank
- On the 28th Sam paid the monthly rent of $900
- On the 29th Sam paid for some google advertising of $150
- On the 31st Sam received café sales of $325