Chapter 2: Analysing transactions and preparing year-end financial statements.
Overview: 1. The basic financial reports 2. Classification of transactions 3. Review of balance sheet and profit and loss statement

© Chris Guilding

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1. The basic financial reports
As part of financial reporting (i.e., external reporting), companies prepare: • a balance sheet, • a profit and loss statement, • a statement of owner’s equity, • a statement of cash flows. The main statements we will be reviewing are the balance sheet and the profit and loss statement.

© Chris Guilding

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1. The basic financial reports (cont’d)
The main sections of a balance sheet: Assets are “things” that are owned (most usually purchased) by the organisation. To qualify as an asset, the organisation should be able to derive some future value from ownership. Typical assets include: cash, accounts receivable, china, silver, glass, linen, stock, cars, equipment, land and buildings. Liabilities may be seen as the opposite of assets. They reflect financial obligations of the organisation. Typical liabilities include: wages & salaries payable, trade creditors and bank loan. Owner’s equity reflects the financial interest of the owner(s) in the organisation. It includes original investment plus all profits © out to the not paidChris Guilding owner(s) (retained profits).

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© Chris Guilding

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1. The basic financial reports (cont’d)
Fundamental balance sheet equation: Assets - Liabilities = Owner’s Equity (A - L = OE) i.e., the owner’s equity (interest) in the company equals the surplus assets that would be left over after the company’s liabilities have been paid off. Alternatively, the balance sheet equation can be stated as: Assets = Liabilities + Owner’s Equity (A = L + OE) i.e., money is raised and goes towards buying assets. Money raised but not “ploughed” into assets is held as cash (which is also an asset). © Chris Guilding

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2. Classification of transactions
Following