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    The Four Financial Statements

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    Mellie Sa
    The document discusses the four main financial statements that businesses use to evaluate profitability and solvency: the balance sheet, income statement, statement of owner's equity, and statement of cash flows. It also explains the fundamental accounting equation that the balance sheet is based on - assets equal liabilities plus equity. Finally, it provides an example transaction of a new bicycle repair shop to illustrate double-entry bookkeeping where transactions are recorded in at least two accounts to remain balanced.

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    The Four Financial Statements

    Uploaded by

    Mellie Sa
    31 views3 pages
    The document discusses the four main financial statements that businesses use to evaluate profitability and solvency: the balance sheet, income statement, statement of owner's equity, and statement of cash flows. It also explains the fundamental accounting equation that the balance sheet is based on - assets equal liabilities plus equity. Finally, it provides an example transaction of a new bicycle repair shop to illustrate double-entry bookkeeping where transactions are recorded in at least two accounts to remain balanced.

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    FA

    Original Title

    Accounting 2

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    The document discusses the four main financial statements that businesses use to evaluate profitability and solvency: the balance sheet, income statement, statement of owner's equity, and statement of cash flows. It also explains the fundamental accounting equation that the balance sheet is based on - assets equal liabilities plus equity. Finally, it provides an example transaction of a new bicycle repair shop to illustrate double-entry bookkeeping where transactions are recorded in at least two accounts to remain balanced.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    31 views3 pages

    The Four Financial Statements

    Uploaded by

    Mellie Sa
    The document discusses the four main financial statements that businesses use to evaluate profitability and solvency: the balance sheet, income statement, statement of owner's equity, and statement of cash flows. It also explains the fundamental accounting equation that the balance sheet is based on - assets equal liabilities plus equity. Finally, it provides an example transaction of a new bicycle repair shop to illustrate double-entry bookkeeping where transactions are recorded in at least two accounts to remain balanced.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Modifying conventions: Materiality, cost-benefit, conservatism convention,

    industry practices convention.

    Financial Statements
    Businesses have two primary objectives:

    Earn a profit

    Remain solvent

    Solvency represents the ability of the business to pay its bills and service its debt.
    The Four Financial Statements are reports that allow interested parties to evaluate the
    profitability and solvency of a business. These reports include the following financial
    statements:

    Balance Sheet

    Income Statement

    Statement of Owner's Equity

    Statement of Cash Flows

    These four financial statements are the final product of the accountant's analysis of the
    transactions of a business. A large amount of effort goes into the preparation of the
    financial statements. The process begins with bookkeeping, which is just one step in the
    accounting process. Bookkeeping is the actual recording of the company's transactions,
    without any analysis of the information. Accountants evaluate and analyze the
    information, making sense out of the numbers.

    For the reports to be useful, they must be:

    Understandable

    Timely

    Relevant

    Fair and Objective (free from bias)

    Fundamental Accounting Model


    The balance sheet is based on the following fundamental accounting equation:

    Assets = Liabilities + Equity


    This model has been used since the 18th century. It essentially states that a business
    owes all of its assets to either creditors or owners, where the assets of a business are
    its resources, and the creditors and owners are the sources of those resources.

    Transactions

    To record transactions, one must:

    1. Identify an event that affects the entity financially.

    2. Measure the event in monetary terms.

    3. Determine which accounts the transaction affects.

    4. Determine whether the transaction increases or decreases the balances in those


    accounts.

    5. Record the transaction in the ledgers.

    Most larger business accounting systems utilize the double entry method. Under double
    entry, instead of recording a transaction in only a single account, the transaction is
    recorded in two accounts.

    To illustrate this concept, take the following example. Mike Peddler decides to open a
    bicycle repair shop. To get started he rents a shop, purchases an initial inventory of bike
    parts, and opens for business. Here are the transactions for the first month:

    Date Transaction
    Sep 1 Owner contributes $7500 in cash to capitalize the business.
    Sep 8 Purchased $2500 in bike parts on account, payable in 30 days.
    Sep 15 Paid first month's shop rent of $1000.
    Sep 17 Repaired bikes for $1100; collected $400 cash; billed customers for the $700
    balance.
    Sep 18 $275 in bike parts were used.
    Sep 25 Collected $425 from customer accounts.
    Sep 28 Paid $500 to suppliers for parts purchased earlier in the month.
    These transactions affect the accounting equation as shown below.

    Assets = Liabilities + Owner's Equity


    Bike Accounts Accounts Peddler, Revenue
    Cash + Parts + Receivable = Payable + Capital + (Expenses)
    Sep 1 7500 = 7500

    Sep 8 2500 = 2500


    Sep 15 (1000) = (1000)

    Sep 17 400 700 = 1100

    Sep 18 (275) = (275)

    Sep 25 425 (425) =


    Sep 28 (500) = (500)
    Totals: 6825 + 2225 + 275 = 2000 + 7500 + (175)

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