Sie sind auf Seite 1von 4

Basic Math

Financial statements (or financial reports)

are formal records of the financial activities of a business, person, or other entity.

are often referred to as accounts

provide an overview of a business or persons financial condition in both short and long
term.

all relevant financial information of a business enterprise, presented in a structured manner


and in a form easy to understand.
Purposes of financial statements

to provide information about the financial position, performance and changes in financial
position of an enterprise that is useful to a wide range of users in making economic decisions

owners and managers require financial statements to make important business decisions
that affect its continued operation

employees also need these reports in making collective bargaining agreements (CBA) with
the management, in case of labor unions or for individuals in discussing their compensation,
promotion, rankings.

prospective investors make use of financial statements to assess the viability of investing
in a business.

banks and other lending institutions use them to decide whether to grant a company fresh
working capital or extend debt securities to finance expansion and other significant expenditures.
Business enterprises are individuals or associations of individuals that control and use
resources for a variety of purposes, specially that of yielding return to the enterprise owner
(Daughtney 1981).
Basic Types of Financial Statements for a Business Enterprise

1.

Balance sheet, also referred to as statement of financial position or condition, reports on a


companys assets, liabilities, and ownership equity as of given point in time.

2.

Income statement, also referred to as Profit and Loss Statement (or a P&L), reports on a
companys income, expenses, and profits over a period of time.

3.

Statement of retained earnings explains the changes in a companys retained earnings


over the reporting time.

4.

Statement of cash flows reports on a companys cash flow activities, particularly its
operating, investing, and financing activities.
Business Transactions
Business transactions are events or exchanges which affect the assets, liabilities or owners
equity of an organization (Druker 1977)
Each transaction consists of debits and credits and for every transaction they must be equal.
For Every Transaction
Value of debits = Value of Credits
A + E = L + OE + R
Where:
A = Assets
E = Expenses
L = Liabilities
OE = Owners Equity
R = Revenues
Debit Accounts (A + E) = Credit Accounts (L + OE + R)
Debits are on the left and an increase in a debt account reduces a credit account. Credits are on
the right and an increase in a credit account decreases a debit account.
Examples:

1.

When you pay with cash, you increase rent (expense) by debiting and decrease cash
(asset) by crediting.

2.

When you receive cash for a sale, you increase cash (asset) by debiting and increase
sales (revenue) by crediting.

3.

When you buy equipment (asset) with cash, you increase equipment (asset) by debiting
and decrease cash (asset) by crediting.

4.

When you borrow cash with a loan, you increase cash (asset) by debiting and increase
loan (liability) by crediting.
Assets are economic resources acquired through a transaction or event that can provide
economic utility in future production or revenues.
Assets are classified (Julian 1974) thus:

1.

Current assets are cash or other types of assets that can readily converted into cash.
These assets are expected to consume or sold within one year or within the normal operating
cycle.
Classification of current assets:

Cash on hand are currency or cash items on hand. Includes checks, bank drafts, money
orders, treasury warrants, etc.

Cash in bank are deposits in a bank which can be withdrawn or used for current
operations without any restrictions

Accounts receivable are open accounts without any formal written promise to pay.

Notes receivable are open accounts with any formal written promise to pay.

Prepaid expenses are short term prepayments of current operating expenditures. Ex:
prepaid rent, prepaid insurance, office supplies, and store supplies
2. Property, plant and equipment are long term or long-lived tangible assets with an estimated
life of more than one year and re acquired for the purpose of using them in the business to
generate revenues.
Classifications:

Land

Building
Equipment plant equipment, office equipment, store equipment, delivery or transport
equipment
Furniture & Fixtures
Liabilities are economic obligations resulting from past transactions or events which can be
measured in monetary terms. They are settled through the performance of economic resources.
Classifications of Liabilities

1.

Current liabilities are obligations which must be liquidated by using current assets or the
creation of other current liabilities within one year of normal operating cycle.
Classifications:

Accounts payable refers to the indebtedness arises from purchase of goods & services,
materials, supplies in an open charge business.

Account payable non-trade are those that do not arise from purchase of merchandise,
materials, supplies in the ordinary course of business

Notes payable are short term obligations which are evidenced by promissory notes.

Accrued liabilities are accumulated debts arising out of services rendered to the business
enterprise before the balance sheet date but payable at later time.

Unearned income includes revenues that are collected in advance but have not been
earned.
2. Long term Liabilities are obligations which are not expected to require the use of current
assets or the creation of current liabilities within one year operating cycle.

Das könnte Ihnen auch gefallen