Elements of Financial Statement

1. Assets (Increase – Debit, Decrease – Credit)

Asset is a present economic resource controlled by the entity as result of past event
and from which future economic benefit is expected by the entity.
Eg: A company purchased a furniture worth $500.
Dr.Furniture – 500
Cr. Cash – 500
Eg: B company purchased a PPE(Property, Plant, and Equipment) worth $600.
Dr. PPE – 600
Cr. Cash – 600
If the transaction was in credit.
Dr. PPE – 600
Cr. Payables – 600
If A company sold a good worth $200 to B company in credit.
Dr. Receivable – 200
Cr. Sales – 200

2. Liabilities ( Increase – Credit, Decrease – Debit)

Liability is a present obligation of the entity to transfer an economic resource as a
result of past event.
Dr. Purchase – 200
Cr. Cash – 200
If the transaction was in credit,
Dr. purchase – 200
Cr. Payables – 200

3. Income ( Increase – Credit, Decrease – Debit)

Income is an element of financial statement that consists of the increases in assets, or
decreases in liabilities.
Eg: A company sold a good worth $500
Dr. cash – 500
Cr. Sales (income) - 500

4. Expense ( Increase – Debit, Decrease – Credit)

It is an element of financial statement that consists of the decrease in assets, or
increase liabilities.
Dr. Purchase (expense)
Cr. cash
 5. Equity/Capital ( Increase – Credit, Decrease – Debit)
The residual interest that comes after the deduction of all liabilities from all assets is
called as equity.
Dr. Cash
Cr. Share capital

Traditional way:
a) Personal Account
Dr. the receiver
Cr. The giver
Eg: B company purchased a PPE(Property, Plant, and Equipment) from C company
worth $600.
Dr. Company B
Cr. Company C

b) Real Account
Dr. What comes in
Cr. What goes out
Eg: B company purchased a PPE(Property, Plant, and Equipment) worth $600.
Dr. PPE - 600
Cr. Cash - 600
c) Nominal Account
Dr. All the expenses and losses
Cr. All income and gains
a) Purchase goods worth $100.
b) Goods sold for $200
a) Dr. Purchase
Cr. Cash
b) Dr. Cash
Cr. Sales Revenue
Q. Prepare the Journal Entries for the following items as for both cash and credit
transactions:
a) Sales
i) Dr. cash
Cr. Sales
ii) Dr. Receivables
Cr. Sales
b) Sales Return
i) Dr. Sales return
Cr. Bank/cash
ii) Dr. Sales return
Cr. Receivables
c) Purchase
i)Dr. Purchase
Cr. Cash
ii) Dr. purchase
Cr. Payables
d) Purchase Return
i) Dr. cash
Cr. Purchase return
ii) Dr. Payables
Cr. Purchase Return
e) Discount Received from supplier ($500 purchase, Discount $100)
i) Dr. Purchase – 500
Cr. Cash – 400
Cr. Discount received (income) – 100
ii) Dr. Purchase – 500
Cr. Payables – 400
Cr. Discount received – 100
iii) Dr. Payables – 100
Cr. Discount received - 100
f) Discount provided to the customer (Sales – 500, discount provided – 100)
i) Dr. Cash – 400
Dr. discount allowed - 100
Cr. Sales – 500
ii) Dr. Receivables – 400
Dr. Discount allowed – 100
Cr. Sales – 500
iii) Dr. discount allowed – 100
Cr. Receivables - 100
 Types of Assets:

Non-Current Assets Current Assets

The assets that are bought with The assets that are bought with
the intention of use rather than the intention of resale. These may
resale. They are expected to be be cash or expected to generate
used by a business for more than cash or other economic benefits
a year to help generate income. within 12 months.
Eg: PPE and Intangibles Eg: Receivables, Bank, Cash etc.

Types of Liabilities:

Non-Current Liabilities Current Liabilities

Which are payable in more than Which are payable in less than 12
12 months' time from the months' time from the reporting
reporting date. date.
Eg: Long- Term Loan Eg: Trade Payables, Overdraft

The Components of a set of financial statements

A set of financial statements comprise
• The statement of financial position
• The statement of profit or loss and other comprehensive income
• The statement of changes in equity
• The statement of cash flows
• Disclosure and notes to the financial statements
 The Statement of Financial Position:

Statement of financial position as at 31 December 20X8

Assets $ $
Non-Current Assets:
Property, Plant and Equipment XX
Investments XX
Intangible Assets XX
XX
Current Assets:
Inventories XX
Trade Receivables XX
Cash XX
XX
Total Assets XXX

Equity and Liabilities

Capital and reserves:
Share Capital XX
Share Premium XX
Revaluation Surplus XX
Retained Earnings XX

Total Equity XX

Non-Current Liabilities:
Long term loans and borrowings XX
XX

Current Liabilities:
Trade Payables XX
Short-term borrowings XX
Bank overdraft XX
Current tax liability XX
XX
Total Equity and Liabilities XXX
Accounting Equation/equation of statement of financial position
Asset = Capital + Liabilities
Capital/Equity = Asset – Liabilities
(Net asset)

Expanded form of accounting equation

Asset = Capital + Liabilities + Profit – Drawing

Closing Capital = Opening Capital + Capital Introduced + Profit - Drawing

Different Accounting Concepts

1. The Accrual Concept:

The transactions are recorded when revenues are earned and when expenses are incurred.
This pays no regard to the timing of the cash payment or receipt.

2. The Going Concern Assumption:

Financial statements are prepared on the assumption that the entity is a going concern, and
will continue to operate for the foreseeable future (i.e. it has neither the need nor the
intention to liquidate or significantly curtail its operations). The normal expectation is that,
based upon current knowledge and understanding of the business, it is reasonable to assume
that the business will continue to operate for the next twelve months.

3. The Business Entity Concept

This principle means that the financial accounting information presented in the financial
statements relates only to the activities of the business and not to those of the owner. From
accounting perspective, the business is treated as being separate from its owners.

4. The Prudence Concept

While preparing financial statements, assets and income should not be overstated whilst
liabilities and expenses should not be understated. A rational decision should be made to
ensure that there is not deliberate misstatement of assets, liabilities, income and expenses.

5. Substance over form

If information is to be presented faithfully, the economic reality must be accounted for and
not just the strict legal form.

6. Materiality
An information is said to be a material information if that information influences the
economic decisions of users of financial statements.
7. Matching Concept:
All income in profit and loss account are matched with all expenses to find out profit for the
period.
Income – Expense = Profit

Statement of Profit and loss and other comprehensive Income

Statement of profit or loss and other comprehensive income for

The year ended 31 December 20X8
$
Sales Revenue XX
Cost of goods sold (cogs) (XX)
(os + P – c/s)
Gross Profit XX

Distribution costs (XX)

Administrative and selling expenses (XX)
Operating Profit XX

Finance/Interest Costs (XX)

Financial/Interest Income XX
Profit Before Tax XX

Income Tax (XX)

Profit for the period XX

Other comprehensive Income:

Revaluation Surplus XX
Total comprehensive Income for the year XX

Process of Preparing financial Statements

1. Data Sources
2. Books of Prime Entry
3. Ledger Accounts
4. Trial Balance
5. Financial Statements
Books of Prime Entry:
Books of Prime Entry Transaction Type
Sales Day Book Credit Sales
Purchase Day Book Credit purchase
Sales Returns Day Book Returns of goods sold on credit
Purchase Returns Day Book Returns of goods bought on credit
Cash Book All bank/cash transactions
Petty Cash Book All small cash transactions
The Journal All transactions not recorded elsewhere

Q. The following transaction took place on 13th August 2020.

1. Credit sales to Ram $400
2. Cash Sales $200
3. Credit sales to Sita $300
4. Cash Sales to X $100
What is the value that goes to sales Day Book?
Credit sales to Ram $400
Credit sales to Sita $300
Sales Day Book $700

Q. Prepare the Journal Entries for the Following Items:

1. Ole purchased goods for $5,000, and pays by cheque.

2. Ole makes a sale to a customer for $500. The customer pays in 30 days' time
3. Ole pays a telephone bill amounting to $40, and pays by cheque.
4. Ole receives bank interest income of $150.
5. Ole purchases stationery for $12 and pays cash.
6. Ole makes a sale to a customer for $400. The customer pays cash.
7. Ole disposed an item of PPE with carrying value $500 for $800.
8. Ole disposed another item of PPE for $400. The carrying value of that item was $600.
9. Ole returns goods worth $750 which was purchased on credit.
10. A customer returns goods to Ole which was sold in credit worth $350
 1. Dr. Purchase 5000
Cr. Cash 5000

2. Dr. Receivable 500

Cr. Sales 500

3. Dr. Telephone bill 40

Cr. Cash/Bank 40

4. Dr. Cash 150

Cr. Interest income 150

5. Dr. Stationery expn 12

Cr. Cash 12

6. Dr. Cash 400

Cr. Sale 400

7. Dr. Cash 800

Cr. PPE 500
Cr. Profit on disposal 300

8. Dr. Cash 400

Dr. Loss 200
Cr. PPE 600

9. Dr. Payables 750

Cr. Purchase return 750

10. Dr. Sales Return 350

Cr. Receivable 350

Creating Ledger Accounts

1. Debit and Credit amount of ledger should be equal. If not equal, then we should find
out the balancing amount which is called 'balance c/f' (Carried Forward) or 'balance
c/d' (carried down).
 2. The balancing amount 'c/f' is carried forward to next period as opening balance b/f
(brought forward). So, closing balance of this period is equal to opening balance of next
period.
3. We have b/f and c/f for only balance sheet items. Profit and Loss items do not have b/f
and c/f. This is because the statement of profit and loss is prepared only for a financial
year. We find profit for the period and is transferred to the retained earning at end of
the year and we create next statement for next year.
4. PNL items also have balancing amount which is transferred to the income statement.
5. The opening balance for debit items (eg: assets and expenses) are in debit side of
ledger account. In the same way, the opening balance for credit items (eg: liabilities,
income, equity) are in credit side.

Dr. Debit items Cr. Dr. Credit items Cr.

$ $ $ $
b/f xx b/f xx
c/f xx c/f xx
xxx xxx xxx xxx

Q. Robert is starting a new company. Prepare the Journal Entries and the relevant ledger
accounts.
1. Robert subscribes for $10,000 of share capital in the newly formed company, paying by
cheque.
Dr. Cash 10000
Cr. Share Capital 10000
2. Robert buys supplies worth $4,000 and pays by cheque.
Dr. Purchase 4000
Cr. Cash 4000
3. Robert buys a delivery van for $2,000 and pays by cheque
Dr. Non-Current Assets 2000
Cr. Cash 2000
4. Robert buys $1,000 of purchase on credit.
Dr. Purchase 1000
Cr. Payables 1000
5. Robert sells goods for $1,500 and receives a cheque of that amount.
Dr. Cash 1500
Cr. Sales 1500
6. Robert sells all his remaining goods for $5,000 on credit.
Dr. Receivables 5000
Cr. Sales 5000
7. Robert pays $800 to his supplier by cheque.
Dr. Payables 800
Cr. Cash 800
8. Matthew pays rent of $200 by cheque.
Dr. Cash 200
Cr. Income 200

Q. Prepare the Journal Entries for the following items:

a) Started a business with $50,000.
Dr. Cash 50000
Cr. Capital 50000

b) Payment of Loan $5,000.

Dr. loan liability 5000
Cr. Cash 5000

c) Mr. Matthew took some goods worth $3,500 from inventory for his personal use.
Dr. Drawing 3500
Cr. Purchase/cogs 3500

d) Cash payment of $2,500 to the supplier.

Dr. Payables 2500
Cr. Cash 2500

e) Cash received of $3,500 from the customer

Dr. Cash 3500
Cr. Receivables 3500
 REVISION QUESTIONS
Q.1 What accounting concept should be considered if the owner of a business takes goods
from inventory for his own personal use?
a) The fair presentation concept
b) The accruals Concept
c) The going concern concept
d) The business entity concept

Q.2 Sales revenue should be recognized when goods and services have been supplied; costs
are incurred when goods and services have been received.
Which accounting concept governs the above?
a) The business entity concept
b) The materiality concept
c) The accruals concept
d) The duality concept

Q.3 Which accounting concept states that omitting or misstating this information could
influence users of the financial statements?
a) The consistency concept
b) the accruals concept
c) The materiality concept
d) The going concern concept

Q.4 A trader's net profit for the year may be computed by using which of the following
formulae?
a) Opening capital + drawings – capital introduced – closing capital
b) Closing capital + drawings – capital introduced – opening capital
c) opening capital – drawings + capital introduced – closing capital
d) opening capital – drawings – capital introduced – closing capital

Q.5 The profit earned by a business in 20X7 was $72,500. The proprietor injected new
capital of $8,000 during the year and withdrew goods for his private use which had cost
$2,200.
If net assets at the beginning of 20X7 were $101,700, what were the closing net assets?
a) $35,000
b) $39,400
c) $168,400
d) $180,000
Q.6 A sole trader took some goods costing $800 from inventory for his own use. The normal
selling price of the goods is $1,600.
Which of the following journal entries would correctly record this?
Dr Cr
$ $
a) Inventory account 800
Purchase account 800
b) Drawings account 800
Purchase account 800
c) Sales account 1,600
Drawings account 1,600
d) Drawings account 800
Sales account 800

Drawing: Drawings are reduction in the liability of business to the owner. Whatever the
owner takes out of the business for personal use, whether goods or cash, reduces the
liability of the business towards the owner, and are thus called drawings.

Q.7 Which of the following are books of prime entry?

1. sales day book
2. Cash book
3. Journal
4. purchase ledger

Q.8 In which book of prime entry will a business record debit notes in respect of goods which
have been sent back to suppliers?
a) The sales return day book
b) The cash book
c) The purchase returns day book
d) The purchase day book

Q.9 A company's trade payables account at 30 September 20X1 is as follows:

Dr. Trade Payables a/c Cr.

$ $
Cash at bank 21,600 Balance b/f 14,000
Balance c/f 11,900 Purchases 19,500
33,500 33,500
What is the balance for trade payables in the trial balance at 30 September 20X1?
 a) $14,000 Dr
b) $14,000 Cr
c) $11,900 Dr
d) $11,900 Cr

Q.10 Bert has extracted the following list of balances from his general ledger at 31 October
20X5: $
Sales 258,542
Opening Inventory 9,649
Purchases 142,958
Expenses 34,835
NCA (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525
What is total of the debit balances in Bert's trial balance at 31 October 20X5?

Business:
Any activity undertaken with the intention to make profit, but result can be profit or loss.
Thus, it is an organization which sells something or provides a service with the objective of
earning profit.
Organization:
It is a place where a group of people are working together to achieve a common goal.

Types of Business Organization

Sole Trader Partnership Limited Company

➢ Owned and managed ➢ Owned and managed by ➢ Owned and managed by

by one person. a number of partners. many people
➢ Sole trader and their ➢ Partners share profits ➢ A company is a legal
business are legally and losses in accordance entity in its own right,
the same entity with their agreement. and therefore the
➢ Therefore sole trader ➢ Partners and business shareholders have only
is fully and personally are legally same due to limited liability for any
liable for any losses of which partners have losses of company.
the business. unlimited liabilities for ➢ Limited company are of
any losses of business. two types: Public and
private limited company.

Types of accounting

Financial Accounting Management Accounting

• Deals with production of financial • Deals with preparation of accounting

statements/ accounting reports for reports for internal users (employees,
external users. management and etc.
• Prepared annually (six monthly or • Normally prepared in monthly basis.
quarterly in some countries). • Not required by law and is not
• Generally required by law. mandatory.
• Reflects past performance and • Production of detail accounts which
current position. help management in control of
• Information are calculated and business.
presented as per International • Includes budget and forecast of
Financial reporting standards. (IAS or future activities as well as
IFRS) reflecting past performance.
Users of Financial Statements:
1. Owners of business:
Owners of the business are interested in their current and future profits and security
of their investment. Profits are shown by Statement of Profit and Loss and Other
Comprehensive Income and financial strength is shown by the Statement of Financial
Position (SOFP).

2. Trade Receivables/customers
They need to know if the company will continue to supply them in future.

3. Trade Payables/Suppliers
They need to know that they will be regularly paid.

4. Lenders
They need to know the ability of business to repay them. Long term loans may also be
backed by 'security' given by business over specific assets. The value of these assets
will be indicated in the SOFP.

5. Government
Information is needed to make financial policies for economy and calculation of tax
payable by a business.

6. Employees
They need to know the financial position and performance of a business to check the
security of their employment. It also gives them information about their future
salaries, bonuses and benefits.

7. Public
They want to assess the effect of company on economy, environment and local
community.

8. Financial analysts/advisors
They want information to base their future investments on it.
 Effects of Some Important Transaction on Accounting Equation

1. Owner puts money into business ($1000)

Dr. Cash 1000
Cr. Capital 1000
Asset = Capital + Liabilities
1000 = 1000 + 0

2. Owner took loan from bank for business ($500)

Dr. Cash 500
Cr. Loan 500
Asset = Capital + Liabilities
1000+500 = 1000 + 500

3. Purchase of building ($600)

Dr. NCA 600
Cr. Cash 600
Asset = Capital + Liabilities
1500+600-600 = 1000 + 500

4. Purchase of goods $100 for cash and $100 on credit

Dr. Purchase 200 (ignore) Dr. Inventory 200
Cr. Cash 100
Cr. Payables 100
Asset = Capital + Liabilities
1500-100+200 = 1000 + 500+100

5. Sale of all the stock goods for $300 ($200 on credit; $100 on cash)
Dr. Receivables 200 Sales 300
Dr. Cash 100 cogs (200)
Cr. Sales (inventory) 300 Profit 100 Cr. Inventory 200
Asset = Capital + Liabilities
1600+200+100-200 = 1000+100 + 600

6. Payment of trade payable $100

Dr. Payables 100
Cr. Cash 100
 Asset = Capital + Liabilities
1700-100 = 1100 + 600-100
7. Owner took $200 of cash for personal use
Dr. Drawing 200
Cr. Cash 200
Asset = Capital + Liabilities
1600-200 = 1100-200 + 500
1400 = 900 + 500
1400 = 1400

October 04 (FA Assignment)

Q. The transactions of a new business in its first five days are as follows:
Day 1 Avon commenced business introducing $1000 cash.
Day 2 Bought a motor car for $400 cash.
Day 3 Obtained a $1000 loan.
Day 4 Purchased goods for $300 cash.
Day 5 Sold all of the goods purchased on day 4 for $400 on credit.
Use the accounting equation to illustrate the position oof the business at the end of each
day. (ignore inventory for this example)