LECTURE 1: FINANCIAL STATEMENT

BUSINESS ACCOUNTING

BY: VINETHA KARUNANITHI

Learning objective
By the end of this lecture, you should be able to understand:
• Statement of Profit or Loss
• Statement of Balance sheet

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Financial statement
• Financial statements are the final product of the accounting process.
• Users of accounting information must be able to read and understand these
financial statements.
• In order to read them, we need to understand the basic terms and categories
of items shown and presented in the statements.
• There are four financial statements that are generally prepared by the
accountant of a business to show the performance and the financial position of
the business.

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Financial statement
• The statement are as follow:
1. Statement of Profit or Loss (was previously known as an income statement).
2. Statement of Financial Position (was previously known as a balance sheet).
3. Statement of Change in Equity
4. Statement of Cash Flow
• The financial statements of a business are usually prepared at the end of the
business accounting period.
• This could be on a monthly or a yearly basis.

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 Profit or Loss

Financial Position
> Change in Equity

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Statement of Profit or Loss
• The Statement of Profit or Loss presents the revenues and expenses and
resulting net profit or net loss of a business for a specific period of time.
• The Statement of Profit or Loss should include a heading which contains the
following items:
1. Name of the business
2. Title of the statement
3. Time period covered by the statement

• In the Statement of Profit or Loss revenue is listed first, followed by expenses.

Revenues - Expenses = Profit/Loss

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Example: Statement of Profit or Loss (Service Industry)

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Example: Statement of Profit or Loss (Trading business)

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Total sales Sales returns / Net sales
return inward

Sales revenue Cost of Goods Gross

Sold Profit/(Loss)

Net profit Operating Other

(Net Loss) expenses revenue

Opening Purchases Closing Cost of Goods

stock stock Sold

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Statement of Financial Position
• The Statement of Financial Position is like a snapshot of the business’s
financial condition at a specific point in time (usually the month-end or year-
end).
• It reports the assets, liabilities and owner’s equity of the business.
• The heading of a Statement of Financial Position should have the following
information:
1. Name of the business
2. Name of the financial statement
3. Date of the statement

ASSETS = LIABILITIES + EQUITY

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Example: Statement of Financial Position
Raman Associates
Statement of Financial Position as at 31 December 2020
RM RM
Assets
Office equipment 10,000
Account receivables 1,000
Bank 49,600
cash 11,800 72,400

Financed by:
Liabilities
Bank loan 20,000
Account payables 10,000 30,000
Owner’s equity
Opening capital 40,000
Add: Net profit for the month 2,600
42,600
Less: Drawings 200
Closing capital 42,400
72,400
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Classification of Statement of Financial Position
Assets Liabilities and Owner’s equity

• Non-current assets • Non-current liabilities

• Current assets • Current liabilities
• Owner’s equity

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1. Non-current assets
• Non-current assets (also known as fixed assets).
• Assets acquired for continuing use over a long period
of time (more than 1 year).
• They are used in the business and not interested for
sale.
• Example:
• Land and building
• Machinery
• Fixture and fittings
• Office equipment
• Motor vehicles

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2. Current assets
• Current assets are cash and other resources that are reasonably expected to
be realised in cash or sold or consumed in the business within one year.
• Example:
• Inventory of goods
• Accounts receivable (debtor)
• Payment in advance (prepaid expenses)
• Cash in hand
• Cash at bank
• Revenue earned but not yet received (accrued revenue)

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3. Non-current liabilities
• Obligations or debts that are expected to be paid after one year are
classified as non-current liabilities.
• Example:
• long-term loan
• mortgage loan
• debentures

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 4. Current liabilities
• Current liabilities consist of obligations or debts that are expected to be
repaid within a year.
• Example of current liabilities are:
• Account payables
• Short-term loan
• Expenses incurred but not yet paid (accrued expenses)
• Bank overdraft
• Revenue received in advance (prepaid revenue)

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5. Owner equity
• The owner’s equity is known as an ‘insider claim’.
• This is the claim held by the owner of the business.
• An owner has a claim to the assets of a business because he/she has
invested in the business.
• Capital is the term used to describe the owner’s investment in the business.
Investment by the owner can be in the form of cash or any other assets.
• Wherever the owner makes an investment into the business, the total owner’s
equity will increase.

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5. Owner equity

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1. Capital
• Capital is the term used to describe the
owner’s investment in the business.
• Investment by the owner can be in the
form of cash or any other assets.
• Wherever the owner makes an
investment into the business, the total
owner’s equity will increase.

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2. Drawings
• An owner may withdraw cash or other assets during the accounting period for
personal use.
• These withdrawals could directly decrease capital.
• However, it is generally considered preferable to use a separate classification
referred to as ‘drawings’ to determine the total withdrawals for the accounting
period.
• Drawings decrease the total owner’s equity.

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3. Revenues
• Revenues or income are the gross increase in owner’s equity resulting from business
activities entered into for the purpose of earning income.
• Generally, revenues result from the sale of goods, the performance of services, the
rental of property and the lending of money.
• Revenues usually result in an increase in assets.
• Examples:
• Sales
• Fees
• Services rendered
• Commission received
• Interest income
• Dividend received
• Royalties
• Rental income

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4. Expenses
• Expenses are the cost of assets consumed or services used in the process of earning
revenue.
• Expenses are the decreases in the owner’s equity that result from operating the
business.
• Expenses represent actual or expected cash outflow or payments.
• Examples:
• Salaries and wages
• Utility expense
• Interest expense
• Rent and rates
• Advertisement
• Maintenance and repairs
• Interest costs
• Income tax expense

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END. THANK YOU