FINANCIAL

STATEMENTS
Source of Communication
Business Entity

An economic unit that controls

resources, incurs obligations and
engages in business activities.
 Forms of Business Organization

Most enterprises are organized as:

 Sole Proprietorship:
An unincorporated business owned by one person
 Partnership:
An unincorporated business owned by two or more persons
voluntarily acting as partners (co-owners)
 Corporation:
A business organized as separate legal entity and chartered by
a state , with ownership divided into transferable shares of
capital stock.
Types of Businesses
 Service Business:
provide services rather than product t o the
customers
 Merchandising Business:
sell products they purchase from other businesses to
the customers
 Manufacturing Business”
change basic inputs into products that are sold to
customers
Separate Business Entity

An economic unit that engages

in identifiable business
activities and is regarded as
separate from the personal
activities of its owners
 Financial Statement
 a declaration of information believed to
be true and communicated in terms of
monetary units
 Purpose: The managers or outside parties
will want to know the result of operations
of Business weather profitable or
unprofitable.Financial statements are
usually prepared once a year.
Primary Financial statements:

1. Income statement
2. Statement of Financial Position
3. Statement of cash flows
 INCOME STATEMENT

A financial statement summarizing the

results of operations of a business during
a specified accounting period resulting in
a net income or a net loss

Net Income= Revenue- Expense

Net Loss= excess of expenses over revenue

 Name of the company
Income Statement
For the period ended on -----------

Revenue:
______________ _______
Expenses:
_______________ _______
_______________ _______
_______________ _______
_______________ _______
_______________ _______ _______

Net Income _______

 Statement of
Financial Position

A Financial statement showing the

financial position of an enterprise by
summarizing its assets, Liabilities and
Owner’s Equity at a point in time
 Name of the company
Balance Sheet
As on -----------

Assets Liabilities & Owner’s Equity

Current Assets:
Liabilities:
Cash _____
Notes Payable _____
A/R _____
Supplies _____ Accounts Payable _____
Fixed Assets:
Building _____ Total Liabilities _____
Land _____ Owners Equity _____
Office Equip _____
_________ _____
 Assets:

Economic resources that are owned by a business

and expected to benefit future operations. (Cash,
A/R, Land, Building, Equipment, Furniture etc.)
 Liabilities:

Financial obligations or debts. (A/P, Notes Payables

etc.). It represents the claim against the borrower’s
assets.
 Owner’s Equity:
Owner’s claim on the assets of the business. O.E is a residual
amount. Therefore

Owner’s Equity = Total Assets – Total Liabilities

Increase In O.E :
1. Investments of cash or other assets by the owner
2. Earnings from profitable operations of the business

Decrease in O.E:
1. Payment of cash or sale of assets
2. Losses from unprofitable operations of the business
 Increase in Assets
Purchase of assets
 Decrease in Assets
Sale of Assets
 Increase in Liabilities
Borrowing funds, purchase on credit
 Decrease in Liabilities
Dispose- off or payments
 Quick Quiz
1) A business entity is owned and run by Alpha, Beta and Gamma.
What type of business is this an example of?
A Sole trader
B Partnership
C Limited liability company
D Don't know
.
2) What are the two main financial statements drawn up by
accountants?
3) Which of the following is an example of a liability?
A Inventory E Salaries
B Receivables F Utility Bills
C Plant and machinery G Fee Earned
D Loan H Money invested in by owner

4) Identify seven user groups who need accounting information