BALANCE SHEET AND
1 THE BUSINESS ENTITY CONCEPT
Definition： financial accounting information
relates only to the activities of the business
entity and not to the activities of its owner.
The entity being accounted for is separate
from its owners, whatever its legal status.
Flows of money between the business and the
proprietors are separately identified other
The accounting The proprietors
entity Cash in
Business (company, Sole trader
sole proprietor, partner
partnership) Cash out shareholders
Cash movement Sole trader, Company
In Either ‘loans Share issue
form proprietors’ process
Or ‘income in
Out Either Dividends
Thekey link between the owner and the
business is the amount stated as capital.
2 THE BALANCE SHEET
The balance sheet lists a business’s assets,
liabilities and capital at a particular in time.
☆ Assets are stated at historical or ‘book’
value, not at realizable value.
☆ Book value is the amount of money that
was paid to acquire a particular asset. Net
realizable of an asset is the money that
might possible to get by selling the asset.
☆The least liquid assets-non-current assets-are listed
☆A non- current assets is any asset, tangible or
intangible, acquired for retention by an entity for the
purpose of providing a service to the business, and
not held for resale in the normal course of trading.
☆Current assets are :
1 Inventory: goods held for resale. When the goods
are eventually sold, the business will receive in
exchange cash or a claim to cash usually referred to
as an account receivable)
2 Accounting receivable: amounts owing from
customers which will eventually result in the receipt of
3 Cash at bank: cash on current account at
4 Cash in hand: notes and coins.
☆ Liabilities are claims on the business by
☆ Current liabilities are those liabilities which are
payable within twelve months of the balance sheet
☆ Payables are amounts owing in respect of goods
and services previously received.
The balance sheet of a sole trader using the vertical
format would appear as follows:
Balance sheet as at
Accounts receivable X
Cash at bank X
Cash in hand X
Capital account: $ $
Balance at beginning of period X
Add :Net profit for period (see X
Less: Drawing for period X
Current liabilities: X
Accounts payable X
Drawing are cash and goods taken by the owner of
the business for his own personal use.
Unless instructed otherwise, use this vertical
layout for balance sheets.
The accounting equation
The balance shows the position of a business
at one point in time, satisfying the basis
balance sheet or accounting equation:
Asset = Proprietor’s capital +Liabilities
Asset-Liabilities = Proprietor’s capital
The balance sheet equation underlies the
balance sheet in that every transaction of the
enterprise affects the balance sheet twice.
----At any point in time the assets of the business
will be equal to its liabilities plus the capital of the
----Each transaction has a double effect on the
accounting equation. This is known as the dual
aspect of transaction, and underlies double
----After each transaction the accounting equation
will always be equal.
3 THE INCOME STATEMENT
■The income statement matches a period
revenues with the costs associated with
generating those revenues.
----Gross profit is the difference between
sales proceeds and the cost of goods sold.
----Net profit is the gross profit less the
expenses of the business.
■The income statement of a sole trader using
the vertical format would appear as follows:
(seeing in next page)
Income statement for the period ended
Sales revenue X
Opening inventory X
Less :closing inventory X
Cost of sales X
Gross profit X
Sundry expenses X
Net profit for the period(see balance sheet) X
■ The linkage between the accounting statement can be seen as follows:
at start of period
+Profit (or less)
Cash in cash to/from Cash out
At end of
4 SUMMARY OF THE EFFECT OF
Transactions Assets Capital
Introduction of cash by proprietor +cash +capital
Purchase of asset for cash +asset No effect
Purchase of asset on credit +cash +liabilities
Sale of inventory at a profit -inventory +capital
Sale of inventory at t profit -inventory +capital
-on credit receivable
Transactions Assets Capital
Payment of account -cash -liabilities
Receipt from account + cash No effect
Drawings by proprietor -cash -capital
Payment of expense in cash -cash -capital
Cash receivable as a loan +cash +liabilities