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

2. 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. 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

4. 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.

5. The income statement

6. 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

7. 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

8. 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

9. 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.

10. 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

11. 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…

12. 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

13. Assets

14. 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

15. 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

16. 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

17. Liabilities

18. 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)

19. Equity

20. Questions