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OBJECTIVES. You should be able to:. Explain the nature and purpose of the three major financial statements. Prepare a simple balance sheet and interpret the information that it contains. Discuss the accounting conventions underpinning the balance sheet.

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OBJECTIVES

You should be able to:

Explain the nature and purpose of the three major financial statements

Prepare a simple balance sheet and interpret the information that it contains

Discuss the accounting conventions underpinning the balance sheet

Discuss the limitations of the balance sheet in portraying the financial position of a business

Measuring and reporting financial position


Cash flow statement

Profit and loss account

Balance sheet

The major financial statements – an overview


Balance sheet at the end of Period 2

Balance sheet at the beginning of Period 1

Balance sheet at the end of Period 1

Profit and loss account 1

Profit and loss account 2

Cash flow statement 2

Cash flow statement 1

Period 1

Period 2

Time

Relationship between the balance sheet, profit and loss account and cash flow statement


Major characteristics

A probable future benefit exists

The business has an exclusive right to control the benefit

The benefit must arise from some past transaction or event

The asset must be capable of measurement in monetary terms

Assets


There are essentially two types of claim against a business:

Capital

Liabilities

Claims


plus business:

equals

Assets

Capital

Liabilities

The balance sheet equation


The balance sheet equation can be extended as follows: business:

equals

plus (minus)

plus

Capital

Assets

Liabilities

Profit (Loss)

The effect of trading operations on the balance sheet


The classification of assets may vary according to the nature of the business:

Fixed assets

Current assets

The classification of assets


Stock nature of the business:

Trade debtors

Cash

The circulating nature of current assets


Long-term liabilities nature of the business:

Current liabilities

The classification of claims


= nature of the business:

+

+

Current liabilities

+

Fixed assets

Current assets

Long-term liabilities

Capital

The equation for the horizontal layout

Fixed assets


+ nature of the business:

-

-

Current liabilities

Long-term liabilities

=

Fixedassets

Current assets

Capital

The equation for the vertical layout


Accounting conventions nature of the business:

Money measurement

Dual aspect

Prudence

Historic cost

Stable monetary unit

Going concern

Business entity

Objectivity

Accounting conventions and the balance sheet


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