Book 3: Introduction to accounting and finance in business? Session 3 3. The accounting statement Sunday 23/11/08 Presented by Dr. Hussain Seroor hseroor@hotmail.com

Aims and objectives At the end of this session you will be able to: Explain the use and relevance of two of the three manor accounting statements used by businesses – the income statement and the balance sheet. Highlight and define the key terms used in the context of these accounting statements.

3.1 the three accounting statements The 3 accounting statements generally used: 1. Income statement: known as the profit and loss account, the profit statement, statement of financial performance, the income and expenditure statement, or the receipts and payments account. 2. Balance sheet: also know as the statement of financial position; 3. cash flow statement

3.2 the income statement It reports on certain financial aspects of transactions that have taken place during the accounting period that has just finished. It shows income earned and expenses Profit: the income is larger than expenses Loss: expenses are lager than the income This is why this statement called the pofit & loss account.

The income statement

Go back to Paula Pipe A Paula’s Pipe Income statement for the period 1 May -31 Oct. B Income £ C Fees for work completed in period 30,500 D Less plumbing components used 10,500 E Gross profit 20,000 F Expenses G Transport costs Petrol, license, repair to van 1,000 H Marketing costs Advertising 400 I Administration costs Bank fees, mobile phone, stationary 600 J Net profit 18,000

Now, Make your own Income statement ……your name……Income statement for the period 1 May -31 Oct. B Income £ C Fees for work completed in period D Less …………..components used E Gross profit F Expenses G Transport costs Petrol, license, repair to van H Marketing costs Advertising I Administration costs Bank fees, mobile phone, stationary J Net profit

3.3 Recognizing revenues Accrual accounting is that each period’s accounts show the financial effects of what has happened to the business during that period. accounting may divide time into convenient periods. Business try to choose periods- ends that fall during period, there will be a continuation in activities from one year to the next… Other business have much longer cycle: pastoral agriculture, forestry (trees 60 yrs)… revenues : العائدات Accrual accounting : لمحاسبة على أساس الإستحقاق / التراكم pastoral agriculture: الزراعة الرعوية

3.4 Recognizing expenses Although Paula’s van cost £5,300, the purchase cost does not show in the income statement as an expense. This is because vans normally last longer than a single accounting period. Remember that: income statement shows what income has been earned in the period, and what expenses were incurred in earning it.

3.4 Recognizing expenses To include the cost of the van, accountancy consider the use of depreciation. Depreciation: divides the cost of long-lasting purchase into smaller amount, and charged as expenses over number of years that the purchase is expected to last. Small business: 40% in the first 25 years

3.5 Taking money out See Paula’s income statement sec.3.2 There was no deducted expenses for: Paula’s income: she is the owner, work full time Pay taxation to tax authority Under UK company law “ separate legal personality” The company can sue and be sued in their own name So there is a taxation in the accounting statement The owners of limited companies are called the shareholders, and expect direct return from their investment…

3.6 The balance sheet The balance sheet shows the financial position of a business at a point In time, as one accounting period ends and another starts. There are five basic accounting elements: Expenses Income Assets Liabilities Equity Expenses Income Assets Liabilities Equity النفقات الدخل الأصول المسؤوليات العدالة

Assets

Assets Things owned or controlled by the business that can generate future benefits in the form of income or services. Tangible: owned and controlled, can be touched: motor vehicles, furniture, etc… Intangible: cannot be touched; money invested in another business

Activity 3.4 List the tangible and intangible assets in your company/business as as shown in table 1: Assets Item Owned/controlled Future benefits Tangible Intangible

Liabilities Liabilities: are straight forward to measure than assets, they are payment due to other entities in term of money. Paula’s Pipes have various source of laiblities: Unpaid bells for components for plumber Tax assessed not paid Bank loan for new van Deposits from customers for work not done

Liabilities

Equity The balance sheet shows the assets & laiblities of the business, the difference between them is known as equity. When business decide to close down; all assets would be sold, all liabilities have to be settled. What remains in the business bank belong to the owner. A – L = E ( Assets – Liabilities = Equity)

Equity

Questions