The financial statements provide a picture of the financial position and performance of a business.
Three financial statements are produced:
➔ Statement of cash flows
➔ Income statement (profit and loss account)
➔ Statement of financial position (balance sheet)
Statement of financial position:
Sets out the assets of a business and the claims against the business.
- Every debit must have a credit (double-entry bookkeeping).
𝐴𝑠𝑠𝑒𝑡𝑠 (𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑)
= 𝐸𝑞𝑢𝑖𝑡𝑦 (𝑎𝑚𝑜𝑢𝑛𝑡 𝑎𝑡 𝑡ℎ𝑒 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑜𝑟 − 𝑙𝑜𝑠𝑠)𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑)
+ 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 (𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑)
An asset is a resource of a business. It has the following characteristics:
➔ ‘Probable future economic benefit must exist’ – item has expected monetary value.
➔ ‘Benefit must arise from some past transaction’ – you must already have the resource.
➔ ‘Business has the right to control the resource’
➔ ‘Asset must be capable of measurement in monetary terms’
Assets include; property, plant/equipment, patents and trademarks, trade receivables, inventories.
A non-current asset is anything that does not meet the definition of current assets.
Current assets:
Held for the short term:
➔ Held for sale/consumption during the business’s normal operating cycle
➔ Expected to be sold within a year after the date of the relevant statement of financial position
➔ Held principally for trading
➔ They are cash/easily marketable, short-term investments
Current assets; inventories, trade receivables (amounts owed by customers for goods/services supplied on
credit) and cash.
, Non-current assets:
Held for long term operations, e.g. property, plant/equipment, motor vehicles
Claims:
A claim is an obligation of the business to provide cash or other form of benefit to an outside party, usually
because an outside party has provided assets for use by the business.
Two types of claims against a business:
➔ Equity: represents the claim of the owners against the business (owner’s capital)
➔ Liabilities: represents the claims of all individuals and organisations, apart from the owners. E.g.
resulting from past transactions like supplying goods/lending money to the business which is then
usually settled by an outflow of assets (cash).
Current liabilities:
Amounts due for settlement in the short term, e.g. trade payables/bank overdraft
➔ Expected to be settled within the business’s normal operating cycle
➔ Exist principally as a result of trading
➔ Settled within a year after the date of the relevant statement of financial position
➔ No right to defer settlement beyond a year after the date of the relevant S.O.F.P
Non-current liabilities:
Do not meet the definition of current liabilities. Due for settlement in the long term e.g. long term borrowings.
𝑁𝑜𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 + 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑁𝑜𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Accounting Conventions Influencing the Statement of Financial Position:
➔ Business entity: The business and its owners are treated as being separate.
➔ Historic cost: Value of assets shown on the S.O.F.P, should be based on their acquisition cost.
➔ Prudence: Caution when making accounting judgements; all losses (actual and expected) should be
recorded at once and in full, whereas profits are only recognised when they actually arise.
➔ Going concern: Financial statements should be prepared in the assumption that a business will
continue operations for the foreseeable future, unless there is evidence to say otherwise.
➔ Dual aspect: Each transaction has two aspects, both of which will affect the statement of financial
position.
Money Measurement (key measurement problems):
Goodwill – quality of the products, the skill of employees, and the relationship with customers.
Product brands is the brand image, the quality of the product and trademark.
These usually are not regarded as an asset as it is difficult to determine their costs, but if acquired through an
‘arm’s length transaction’, e.g. goodwill acquired when taking over another business for a price, then these can
be regarded as an asset and included in the S.O.F.P
Monetary stability: Due to inflation, the value of money has declined in relation to the historic cost of assets,
reflecting figures for assets that were much lower.
Human resources are difficult to play a monetary measurement on and difficulties arise when trying to report
them in the S.O.F.P as HR cannot be owned, buy you can own rights to their services, and this will be seen as the
asset.
Uses of the S.O.F.P:
- Shows how the business is financed and how funds are deployed
- Can provide a basis for assessing the value of the business
Three financial statements are produced:
➔ Statement of cash flows
➔ Income statement (profit and loss account)
➔ Statement of financial position (balance sheet)
Statement of financial position:
Sets out the assets of a business and the claims against the business.
- Every debit must have a credit (double-entry bookkeeping).
𝐴𝑠𝑠𝑒𝑡𝑠 (𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑)
= 𝐸𝑞𝑢𝑖𝑡𝑦 (𝑎𝑚𝑜𝑢𝑛𝑡 𝑎𝑡 𝑡ℎ𝑒 𝑠𝑡𝑎𝑟𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 + 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑜𝑟 − 𝑙𝑜𝑠𝑠)𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑)
+ 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 (𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑)
An asset is a resource of a business. It has the following characteristics:
➔ ‘Probable future economic benefit must exist’ – item has expected monetary value.
➔ ‘Benefit must arise from some past transaction’ – you must already have the resource.
➔ ‘Business has the right to control the resource’
➔ ‘Asset must be capable of measurement in monetary terms’
Assets include; property, plant/equipment, patents and trademarks, trade receivables, inventories.
A non-current asset is anything that does not meet the definition of current assets.
Current assets:
Held for the short term:
➔ Held for sale/consumption during the business’s normal operating cycle
➔ Expected to be sold within a year after the date of the relevant statement of financial position
➔ Held principally for trading
➔ They are cash/easily marketable, short-term investments
Current assets; inventories, trade receivables (amounts owed by customers for goods/services supplied on
credit) and cash.
, Non-current assets:
Held for long term operations, e.g. property, plant/equipment, motor vehicles
Claims:
A claim is an obligation of the business to provide cash or other form of benefit to an outside party, usually
because an outside party has provided assets for use by the business.
Two types of claims against a business:
➔ Equity: represents the claim of the owners against the business (owner’s capital)
➔ Liabilities: represents the claims of all individuals and organisations, apart from the owners. E.g.
resulting from past transactions like supplying goods/lending money to the business which is then
usually settled by an outflow of assets (cash).
Current liabilities:
Amounts due for settlement in the short term, e.g. trade payables/bank overdraft
➔ Expected to be settled within the business’s normal operating cycle
➔ Exist principally as a result of trading
➔ Settled within a year after the date of the relevant statement of financial position
➔ No right to defer settlement beyond a year after the date of the relevant S.O.F.P
Non-current liabilities:
Do not meet the definition of current liabilities. Due for settlement in the long term e.g. long term borrowings.
𝑁𝑜𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 + 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 = 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑁𝑜𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Accounting Conventions Influencing the Statement of Financial Position:
➔ Business entity: The business and its owners are treated as being separate.
➔ Historic cost: Value of assets shown on the S.O.F.P, should be based on their acquisition cost.
➔ Prudence: Caution when making accounting judgements; all losses (actual and expected) should be
recorded at once and in full, whereas profits are only recognised when they actually arise.
➔ Going concern: Financial statements should be prepared in the assumption that a business will
continue operations for the foreseeable future, unless there is evidence to say otherwise.
➔ Dual aspect: Each transaction has two aspects, both of which will affect the statement of financial
position.
Money Measurement (key measurement problems):
Goodwill – quality of the products, the skill of employees, and the relationship with customers.
Product brands is the brand image, the quality of the product and trademark.
These usually are not regarded as an asset as it is difficult to determine their costs, but if acquired through an
‘arm’s length transaction’, e.g. goodwill acquired when taking over another business for a price, then these can
be regarded as an asset and included in the S.O.F.P
Monetary stability: Due to inflation, the value of money has declined in relation to the historic cost of assets,
reflecting figures for assets that were much lower.
Human resources are difficult to play a monetary measurement on and difficulties arise when trying to report
them in the S.O.F.P as HR cannot be owned, buy you can own rights to their services, and this will be seen as the
asset.
Uses of the S.O.F.P:
- Shows how the business is financed and how funds are deployed
- Can provide a basis for assessing the value of the business
