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BALANCE SHEET AND INCOME STATEMENT THE

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BALANCE SHEET AND INCOME STATEMENT THE Powered By Docstoc
					CHAPTER 2
    BALANCE SHEET AND
     INCOME STATEMENT
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
  money flows:
The accounting                            The proprietors
entity                  Cash in
                     Loans,investments.
                     etc
Business (company,                        Sole trader
sole proprietor,                          partner
partnership)            Cash out          shareholders
                 Drawings,dividends
                 .etc
Cash movement Sole trader,        Company
From/to       partnership
proprietors
In            Either ‘loans       Share issue
              form proprietors’   process
              Or ‘income in
              capital’
Out           Either              Dividends
              ‘drawings’or
              ‘reduction in
              capital’
 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.
 Asset
☆ 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
  first.
☆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
  cash
3 Cash at bank: cash on current account at
  the bank.
4 Cash in hand: notes and coins.
 Liabilities
☆ Liabilities are claims on the business by
 outsiders.
☆ Current liabilities are those liabilities which are
 payable within twelve months of the balance sheet
 date.
☆ 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
                             $   $
Non-current assets:
  Vehicles                       X
Current assets:
  Inventory                  X
  Accounts receivable        X
  Cash at bank               X
  Cash in hand               X
                                 X
                                 X
Capital account:                  $   $
  Balance at beginning of period X
  Add :Net profit for period (see X
 income statement)
                                  X
  Less: Drawing for period        X
                                      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
                       or
    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
business.
----Each transaction has a double effect on the
accounting equation. This is known as the dual
aspect of transaction, and underlies double
entry bookkeeping.
----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
Purchases                                      X
                                               X
Less :closing inventory                        X
Cost of sales                                      X

Gross profit                                       X
Wages                                          X
Rent                                           X
Sundry expenses                                X
                                                   X
Net profit for the period(see balance sheet)       X
■ The linkage between the accounting statement can be seen as follows:

                        Balance sheet
                       at start of period




                       +Profit (or less)



                        Movement of
        Cash in         cash to/from        Cash out
                         proprietors




                        Balance sheet
                          At end of
                           period
4 SUMMARY OF THE EFFECT OF
  TRANSACTIONS
Transactions                         Assets       Capital
                                                  and
                                                  liabilities
Introduction of cash by proprietor   +cash        +capital


Purchase of asset for cash           +asset       No effect
                                     -cash
Purchase of asset on credit          +cash        +liabilities


Sale of inventory at a profit        -inventory   +capital
                                     +cash
-for cash
Sale of inventory at t profit        -inventory   +capital
                                     +account
-on credit                           receivable
Transactions                 Assets       Capital
                                          and
                                          liabilities
Payment of account           -cash        -liabilities

Payable
Receipt from account         + cash       No effect
                             -account
Receivable                   receivable


Drawings by proprietor       -cash        -capital


Payment of expense in cash   -cash        -capital


Cash receivable as a loan    +cash        +liabilities

				
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posted:10/9/2012
language:English
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