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The document outlines the importance of financial statements in tracking business progress and informing decision-making, detailing components such as income statements and statements of financial position. It explains key accounting concepts, including assets, liabilities, and the accounting equation, while also discussing the preparation of financial statements. Additionally, it highlights the classification of assets and liabilities, as well as the nature of transactions in accounting.

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4 views4 pages

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The document outlines the importance of financial statements in tracking business progress and informing decision-making, detailing components such as income statements and statements of financial position. It explains key accounting concepts, including assets, liabilities, and the accounting equation, while also discussing the preparation of financial statements. Additionally, it highlights the classification of assets and liabilities, as well as the nature of transactions in accounting.

Uploaded by

leeann060804
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Introduction:

Why are financial statements important?


- Financial statements help businesses track their progress and make informed decisions.

What does an income statement show?


- An income statement shows a business’s revenue, expenses, and whether it made a
profit or loss.

What does a statement of financial position show?


- It shows a business’s assets (what it owns) and liabilities (what it owes), along with its
financial position.

How does a statement of financial position help?


- It helps determine if a business can meet its financial commitments and how efficiently
it is using its resources.

What are accounting principles?


- Accounting principles are rules that ensure financial records are accurate, reliable and
consistent.

How has technology changed accounting?


- Technology has replaced manual bookkeeping with computer systems, but accounting
principles and processes remain the same.

1.1 The purpose of accounting

What is the purpose of accounting?


- Accounting provides financial information to help businesses make decisions, monitor
progress, and ensure survival and efficiency.

What are the main concerns of a business owner?


- Whether the business is making a profit.
- If they have enough money to pay their commitments on time.
- Whether they are using funds effectively.

What is book-keeping?
- Bookkeeping is the recording of financial transactions in a systematic way.

What is accounting?
- Accounting involves selecting, classifying, summarizing, and analyzing financial
information to help business owners assess performance and plan for the future.
How does accounting help in decision-making?
- It provides detailed financial information that helps owners and managers make
informed business decisions.

Assets, Liabilities and Capital

What are assets?


- Assets are resources with monetary value that are owned by a business and provide a
benefit.

Give three examples of business assets.


- Buildings
- Machinery
- Cash

What are trade receivables?


- Trade receivables are amounts owed to the business by customers who bought on
credit. They are assets.

What are liabilities?


- Liabilities are amounts a business owes to other businesses, individuals or organizations.

Give two examples of liabilities.


- Bank loans
- Trade payables

What are trade payables?


- Trade payables are amounts the business owes to suppliers for goods bought on credit.
They are liabilities.

What is capital?
- Capital is the investment made by the owner(s) of a business. In limited companies, it is
often called equity.

The Accounting Equation and Simple Statements of Financial Position

What is the accounting equation?


- The accounting equation is: Assets = Capital + Liabilities

What does the accounting equation show?


- It shows the relationship between a business’s assets, the owner’s capital and any
liabilities (amounts owed to others).
If a business has assets worth $50,000 and liabilities of $10,000, what is the capital?
- Use the equation: Assets = Capital + Liabilities
$50,00 = Capital + $10,000
Capital = $40,000

What is a statement of financial position?


- It is a financial report that shows a business’s assets, liabilities, and capital at a specific
date.

If capital is $30,000 and liabilities are $5,000, what are the total assets?
- Using the equation = Assets = Capital + liabilities
Assets = $30,000 + $5,000
Assets = $35,000

How to Prepare a Simple Statement of Financial Position

What is a statement of financial position?


- A statement of financial position is a document that shows a business’s assets, liabilities,
and capital at a specific date.

What are the key steps to prepare a statement of financial position?


1. Calculate total assets.
2. Calculate total liabilities.
3. Use the accounting equation to find capital: Assets = Capital + Liabilities
4. Write a title in the correct format: Statement of financial position of [business name] at
[date]
5. List all assets and total them.
6. List capital and liabilities and total them.

Why is the title of the statement of financial position important?


- The title must include the name of the business and the exact date to ensure clarity and
accuracy.

If a business has assets worth $100,000 and liabilities of $30,000, what is the capital?
- Using the equation: Assets = Capital + Liabilities
$100,000 = Capital + $30,000
Capital = $70,000

Key Points on Preparing a Classified Statement of Financial Position

Assets are divided into two categories:


- Non-current assets (held for more than a year): e.g. premises, machinery, vehicles,
furniture.
- Current assets (held for less than a year): e.g. inventory, trade receivables, bank, and
cash.

Liabilities are also divided into two categories:


- Non-current liabilities (repaid after more than a year): e.g. bank loans.
- Current liabilities (repaid within a year): e.g. trade payables, bank overdrafts.

Order of permanence is used when listing assets:


- Non-Current assets: Start with land, then premises, followed by other assets in order of
value.
- Current assets: Start with inventory, then trade receivables, bank, and finally cash.

Why classify assets and liabilities?


- Helps businesses track long-term and short-term resources.
- Makes financial analysis and decision-making easier.

Sources and recording of data


Transactions
- A transaction is any financial activity, such as buying, selling, spending, or receiving
money.
- Transactions can involves different payment methods, including cash, cheques, credit
cards, debit cards, and online payments.

Transactions are categorized into:


 Cash transactions – Where payment happens immediately.
 Credit transactions – Where payment is delayed and settled at a later date.

Credit transactions
- Businesses often buy goods on credit from suppliers and pay later.
- Similarly, businesses sell goods on credit to customers and receive payment later.

Key terms
 Transactions – A financial activity or financial event.
 Cash transaction – Payment happens immediately.
 Credit transactions – Payment is delayed.

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