Entrepreneurship

BM019-3-3

Financial Aspects
Anita.Apiit.
 LEARNING OUTCOMES

• To learn the nature of accounting in

entrepreneurship.
• To understand the process of accounting
• To overview the three financial statements and
its contents.

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 The Nature of Accounting

• The recording, measurement, and interpretation of

financial information, often used in making
business decisions.

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 -Management -Stockholders
-Lenders (banks -Potential
etc) investors
-Suppliers -Government
Agencies

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 Accounting versus Bookkeeping

• Bookkeeping is much narrower and mainly

involves recording of business transactions.

• Typically limited to routine day-to-day business

transactions recording information that
accountants use in financial analysis.

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 Accounting Cycle- 6 steps

Analyse Transfer
source Record (post) Create
documents transactions journal Trial
in journals entries to Balance
ledger

Prepare
Anaylse Income
Financial Statement
statements &
Balance
sheet

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 Accounting Cycle- (cont)

Journal :- The book where accounting data are first entered.

Double-entry:- The concept of writing every transaction in

two places.

Ledger :- Record, divided into accounts and usually compiled

on a monthly basis, containing summaries of all
journal transactions.

Trial Balance :- A summary of all the data in the accounts

ledgers to show whether the figures are correct
and balanced.

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 Understanding Key Financial Statements

Financial Statement: - A summary of all transactions that

have occurred over a particular period.
.

 Balance Sheet
 Income Statement/
Profit and Loss Statement
 Cash Flow Statement

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 Financial Statements
Balance Sheet
:- Financial statement detailing a firm’s assets, liabilities and owners’ equity at a given
moment.
-shows the financial position of a business at a fixed date.

ASSETS :- Any economic resource expected to benefit a firm or

individual who owns it.

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• Current assets:
- Items that can be converted into cash within one year.
E.g. inventory, cash, debtors

• Fixed assets :
- Assets with a long-term use or value, such as land,
buildings and equipment. (not intended for re-sale)

• Intangible assets
:- Items of value such as patents and copyrights that
have no real physical form.

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 Understanding Key Financial Statements

LIABILITY :- Debt owed by a firm to an outside organisation

or individual.

Current Liability :- Debt that must be paid within a year.

E.g. Accounts payable.

Long-term Liability :- Debt not due for more that a year.

OWNERS EQUITY(Capital) :- Is the net worth of an individual or

business
- asset minus liabilities.

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 The Accounting Process

• The accounting equation is the

basis for the balance sheet:

Assets - Liabilities = Owners’ Equity (Capital)

Things A firm’s debts The difference between a firm’s
of value and obligations assets and its liabilities
that a firm
owns

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 Tan’s Flowers - Balance Sheet (December 31, 2004)
Assets: Rm Rm
Current Assets:
Cash: 17,850
Accounts Receivable 10,200
Merchandise Inventory 8,750
Total Current Assets: 36,800

Property & Equipment

Equipment 11,050
Office Building 73,850
Total Prop. & Equip. 84,900

Total Assets: Rm 121,700

Liabilities & Owner’s Equity
Current Liabilities
Acct’s Payable 12,600
Total Current Liabilities 12,600
Long-term Liabilities
Mortgage Payable 23,600
Total Liabilities 36,200
Owner’s Equity:
Tan Chew, Capital 85,500
Total Liabilities & Owner’s Equity Rm 121,700

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 Income Statement
• A financial report that shows an organisation’s
profitability over a period of time. E.g. a month, quarter
or year.

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 Income Statement (cont)
a) Revenue: Funds that flow into a business from the sales
of goods or services.

b) Cost of goods sold: Total cost of obtaining materials for making the
products sold by a firm during a year.

c) Gross Profit: How much the firm earned by buying or selling

merchandise.

d) Operating Expenses: Cost incurred in operating a business such as

rent, utilities and salaries.

e) Net income: Profit or loss over a specific period after subtracting

all costs and expenses including taxes.

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 Income Statement (cont)

Revenue
- Cost of goods sold
Gross Profit
- Operating expenses
Net income before taxes
- Taxes
Net income or loss

Gross profit or sales profit or gross operating profit is the difference between revenue and the cost of
making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments
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 Tan’s Flowers - Income Statement
December 31, 2004
a)Revenues:
Gross Sales Rm 250,000
Less: Sales discount 10,000
Net Sales Rm 240,000

b)Cost of Goods Sold (Rm 100,000)

c) Gross Profit Rm 140,000

d) Operating expenses
Selling Expenses 30,000
General & Admin. 40,000
*Depreciation 8,000
Other expenses 12,000
Total Operating Expenses (Rm 90,000)

Net income before taxes Rm 50,000

Less: income tax expenses (Rm 11,000)

e) Net Income Rm 39,000

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 Statement of Cash Flow
Statement of Cash Flow :
Financial statement that describing a firm’s yearly cash
receipts and cash payment related to a firm’s major activities;
(records the inflow and outflow of cash over a period of time)

Purpose: provide information on a firm's liquidity

-does not include the amount of future incoming and outgoing
cash
a) Operations- cash transactions associated with running
the business.

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 CASH FLOW STATEMENT

b) Investments- cash used in or provided by the

firm’s investment activities to buy new equipment,
buildings or short-term assets such as marketable
securities

c) Financing- cash raised from issuance of new

debt or equity capital or cash used to pay
business expenses, past debts, or company cash
in" when capital is raised (eg: issue bonds to public)and
they're "cash out" when dividends are paid .

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