Session Objectives

Topic 2

Explain the main elements of financial
Elements of Financial statements
Statements
Describe the purpose of financial
statements

Identify the main types of business
transactions

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Session Objectives What are Financial Statements

Describe the accounting equation “Reports that quantitatively summarize

Explain the matching convention and the financial status of an organization for
duality concept a stated period of time. They include an

Draft simple financial statements income statement and balance sheet
describing the flow of resources, profit or
loss, and the distribution or retention of
profits.”

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
 Primary Financial Statements Balance Sheet

Balance sheet
Describes where the enterprise stands at

Income Statement a specific date. It can be shown in two

Statement of Cash Flows formats:
 Horizontal
 Vertical

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Example of a Horizontal Example of a Vertical Balance

Balance Sheet Sheet

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
 Income Statement Example of Income Statement

Depicts the revenue and expenses for a

designated period of time.

Net income (or net loss) is simply the
difference between revenues and
expenses.

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Statement of Cash Flows Balance Sheet Equation

Depicts the ways cash has changed
Assets – Liabilities = Proprietor's Capital
during a designated period of time.
Horizontal format balance sheet is an
expansion of this form of the accounting
equation

Assets = Proprietor's Capital + Liabilities

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
 Assets Assets

Assets are economic resources that are

owned by the business and are expected
to provide positive future cash flows.

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Types of Assets Types of Assets

Fixed Assets
Current Assets

 Any tangible or intangible asset acquired on  Assets which are expected to be realised in
a long-term basis to be used in providing a the normal course of trading
service to the business  Disclosed in the balance sheet with least
 Not held for resale in normal course of liquid asset first e.g. Stock, debtors
business e.g. land and buildings, plant and
machinery

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
 Liabilities Liabilities

Liabilities are debts that represent

negative future cash flows for the
enterprise.

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Types of Liabilities Owners’ Equity

Long-term liabilities
Owners’ equity represents the owner’s

 Payable more than 12 months after the claim to the assets of the business.
balance sheet date e.g. loan

Current liabilities
 Payable within 12 months of the balance
sheet date e.g. creditors, bank overdraft

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
 Owners’ Equity Changes in Owners’ Equity

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Understanding Income The Concept of the Business

Statement Entity

According to this concept, a business
entity is separate from the personal
affairs of its owner..

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting
 Revisiting Accounting Relationships Among Financial
Equation Statements

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting © accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting