Primary financial statements Purpose is to report
TRANSACTIONS AND EVENTS
Practice of bookkeeping
ACCOUNTING RECORDS
Rules of measurement and disclosure
FINANCIAL STATEMENTS
Financial Accounting
Horizontally, it is as follows:
The following list of assets and liabilities of P. Masons legal practice was prepared from the
Financial Accounting
List of assets and liabilities at 30 September Year 5: P. Mason s legal practice
Statement of financial position (balance sheet) at 30 September Year 5
Financial Accounting
The income statement (profit and loss account) reflects that part of the accounting equation that
defines profit.
Profit equals revenue minus expenses
Financial Accounting
The accounting records of P. Mason s legal practice
at 30 September Year 5 showed that the ownership
interest could be explained as follows
(using brackets to show negative items):
P. Masons legal practice
Income statement (profit and loss account) for the
month of September
Increases in claim
Financial Accounting
Liquidity is measured by the cash and near-cash assets and the change in those assets; hence, a
financial statement that explains cash flows should be of general interest to user groups.
Cash flow equals cash inflows to the enterprise minus cash outflows from the enterprise.
The statement of cash flows will appear in a vertical form:
Financial Accounting
Structure of a statement of cash flows
Operating activities
minus
plus
Investing activities
minus
plus
Financial Accounting
P. Mason legal practice
Statement of cash flows for the month of September Year 5
Year 5
Cash received
Financial Accounting
P. Masons legal practice
Profit Cash flow EXPLANATION
Total expenses/total cash paid
The list of transactions is as follows:
P Masons legal practice.
Assets equal to Liabilities plus Ownership interest
Debit entries in a
ledger account
Credit entries in a
ledger account
Left-hand side of the equation
Financial Accounting
P. Masons legal practice.
The business acquires an asset (cash in the bank) and an ownership interest is created
through contribution of capital.
Transaction number: 1 Debit Credit
The business acquires an asset of cash and a long-term liability is created.
Transaction number: 2 Debit Credit
The business acquires an asset of land and buildings (£250,000 in total) and the asset of
cash in the bank is reduced.
Transaction number: 3
The business acquires an asset of furniture and also acquires a liability to pay the supplier,
Stylecraft. The liability is called a trade payable (creditor).
Financial Accounting
Transaction number: 4 Debit Credit
The business acquires an asset of prepaid insurance (the benefit of cover exists in the future)
and the asset of cash at bank is reduced.
Transaction number: 5 Debit Credit
The successful outcome of the interview is an event and there is an expected future benefit
from employing the new legal assistant. The employee will be controlled by the
organisation through a contract of employment. The organisation has a commitment to pay
her the agreed salary. It could be argued that the offer of employment, and acceptance of
Financial Accounting
Transaction number: 6 Debit Credit
Transaction number: 7 Debit Credit
Transaction number: 8 Debit Credit
Transaction number: 9 Debit Credit
Financial Accounting
The asset of cash at bank decreases and the salary paid to the legal assistant is an expense of the
month.
Transaction number: 10 Debit Credit
One line for each transaction.
Financial Accounting
No Land and
buildings
Office
furniture
Trade
receivables
Pre-
payments
Cash at
bank
= Trade
payables
Bank loan Revenue Expenses Owners
capital
contributed
Financial Accounting
No Land and
buildings
Office
furniture
Trade
receivables
Pre-
payments
Cash at
bank
Trade
payables
Bank loan Revenue Expenses Owners
capital
contributed
Financial Accounting
Turning the spreadsheet back to a vertical listing, using the debit column for items where the
Debit Credit