f3 Acca Lesson2

© accountingclassroom.com 2008 Student Notes for ACCA F3-Financial Accounting

Elements of Financial Statements

Topic 2


Session Objectives

� Explain the main elements of financial statements

� Describe the purpose of financial statements

� Identify the main types of business transactions


Session Objectives

� Describe the accounting equation

� Explain the matching convention and duality concept

� Draft simple financial statements


What are Financial Statements

“Reports that quantitatively summarize

the financial status of an organization for

a stated period of time. They include an

income statement and balance sheet describing the flow of resources, profit or

loss, and the distribution or retention of

profits.”


Primary Financial Statements

� Balance sheet

� Income Statement

� Statement of Cash Flows


Balance Sheet

� Describes where the enterprise stands at a specific date. It can be shown in two formats:

� Horizontal

� Vertical


Example of a Horizontal

Balance Sheet


Example of a Vertical Balance

Sheet


Income Statement

� Depicts the revenue and expenses for a designated period of time.

� Net income (or net loss) is simply the difference between revenues and expenses.


Example of Income Statement


Statement of Cash Flows

� Depicts the ways cash has changed during a designated period of time.


Balance Sheet Equation

� Assets – Liabilities = Proprietor's Capital

� Horizontal format balance sheet is an expansion of this form of the accounting equation

� Assets = Proprietor's Capital + Liabilities


Assets

� Assets are economic resources that are owned by the business and are expected to provide positive future cash flows.


Assets


Types of Assets

� Fixed Assets

� Any tangible or intangible asset acquired on a long-term basis to be used in providing a service to the business

� Not held for resale in normal course of business e.g. land and buildings, plant and machinery


Types of Assets

� Current Assets

� Assets which are expected to be realised in the normal course of trading

� Disclosed in the balance sheet with least liquid asset first e.g. Stock, debtors


Liabilities

� Liabilities are debts that represent negative future cash flows for the enterprise.


Liabilities


Types of Liabilities

� Long-term liabilities

� Payable more than 12 months after the balance sheet date e.g. loan

� Current liabilities

� Payable within 12 months of the balance sheet date e.g. creditors, bank overdraft


Owners’ Equity

� Owners’ equity represents the owner’s claim to the assets of the business.


Owners’ Equity


Changes in Owners’ Equity


Understanding Income

Statement


The Concept of the Business

Entity

� According to this concept, a business entity is separate from the personal affairs of its owner..


Revisiting Accounting

Equation


Relationships Among Financial

Statements

Documents

f3 Acca Lesson2