Understanding the Statement of Financial Position in Accounting

School

Uni. Southampton**We aren't endorsed by this school

Course

MANG 1015

Subject

Accounting

Date

Dec 10, 2024

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Uploaded by AdmiralOctopus4857

MANG1046Introduction to Accounting and Finance Statement of Financial PositionHesham BassyounyRocchina Covucci

Introduction Learning OutcomesWhat are the financial statements and what do they comprise of? What is the Statement of Financial Position?What is the accounting equation?What do we mean by assets, liabilities and equity of a business?Transaction analysis2

1.Statement of financial position (balance sheet): what is the accumulated wealth of the business and what form does it take?2.Income statement (profit and loss account): how much wealth is generated?3.Statement of cash flow: what cash movements took place?4.Statement of changes in equity: what changes in capital? Financial Health of the BusinessFinancial StatementsMain financial statements 3

Assets must equal the sum of liabilities and equity.Statement of financial position •The statement lists the assets, liabilities, and equityof an organisation as of the report date.•As such, it provides a snapshot of the financial condition of a business as of a specific date.Basic Accounting Equation =+AssetsLiabilities Equity4

Resources a business owns or controls.Provide future services or benefits.Cash, Inventory, Equipment, Trade receivable. etc.=+Statement of financial position Liabilities AssetsEquityAssets 5

Claims against assets (debts and obligations).Creditors (party to whom money is owed).Trade Payable, Notes Payable, Salaries and Wages Payable, etc.=+Statement of financial position AssetsLiabilities EquityLiabilities 6

=+Statement of financial position AssetsLiabilities EquityEquityOwnership claim on total assets.Referred to as residual equity.E.g Ordinary Share Capital and Retained Earnings.In layman’s terms, equity =the net worth of the business7

8Could also be presented as:Net assetsAccounting equation=+AssetsLiabilities Equity=-AssetsLiabilities Equity

9Transaction analysis Note: Dividends can only be paid if retained earnings are positiveEach transaction has a dual effect on the accounting equation.

ALEREProfitStatement of Financial Position (Balance Sheet)Income Statement (Profit and Loss Statement)Accounting equationAccounting equation

11Investments by shareholders represent the total amount paid in by shareholders for the ordinary shares they purchase.Investment of funds with the intention of earning a return Equity RevenuesRevenuesDividends to shareholders Dividends to shareholders Investments by shareholders Investments by shareholders Expenses Expenses Equity Equity INCREASESDECREASES

12Equity Revenues result from business activities for the purpose of earning income.Common sources of revenue are sales, fees, services, commissions and rent.RevenuesRevenuesDividends to shareholders Dividends to shareholders Investments by shareholders Investments by shareholders Expenses Expenses Equity Equity INCREASESDECREASES

13Equity Dividendsare the distribution of cash or other assets to shareholders.Dividends reduce retained earnings.RevenuesRevenuesDividends to shareholders Dividends to shareholders Investments by shareholders Investments by shareholders Expenses Expenses Equity Equity INCREASESDECREASES

14Equity RevenuesRevenuesDividends to shareholders Dividends to shareholders Investments by shareholders Investments by shareholders Expenses Expenses Equity Equity INCREASESDECREASESExpensesare the cost of assets consumed or services used in the process of earning revenue.Common expenses include salaries expense, rent expense, utilities expense, property tax expense, etc.

15Equity RevenuesRevenuesDividends to shareholders Dividends to shareholders Investments by shareholders Investments by shareholders Expenses Expenses Equity Equity INCREASESDECREASESRevenues – Expenses = Profit for the YearIf you make a profit for the year, equity goes upIf you make a loss, equity goes down

16Transaction analysis Every time there is an event or transaction within the business, it has two effects on the accounting equation. Every time there is an event or transaction within the business, it has two effects on the accounting equation. Assumptions Assumptions Monetary Unit include in the accounting records only transaction data that can be expressed in terms of money.Monetary Unit include in the accounting records only transaction data that can be expressed in terms of money.Economic Entity requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.Economic Entity requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.For anything that happened in the business that can be expressed financially, what are the two effects?What transactions should we record in the accounting system?

17What transactions should we record?EventPurchase computerCriterionIs the financial position (assets, liabilities, or stockholder’s equity) of the company changed?Discuss product design with potential customerPay rentRecord/ Don’t RecordTransaction analysis Illustration: Are the following events recorded in the accounting records?

18Retained EarningsRev. – Exp. – Div.Trans-actionCash AccountsReceivableSuppliesEquipmentAccountsPayableShare Capital1.+15,000+15,000Assets= Liabilities +Equity+++++=TransactionsTRANSACTION 1. INVESTMENT BY STOCKHOLDERS •Ray and Barbara Neal decide to start a smartphone app development company that they incorporate as Softbyte.•On September 1, 2017, they invest £15,000 cash in the business in exchange for £15,000 of ordinary shares.•The ordinary shares indicates the ownership interest that the Neals have in Softbyte SA. •This transaction results in an equal increase in both assets and equity.

19+Trans-actionCash AccountsReceivableSuppliesEquipmentAccountsPayableShare CapitalRetained EarningsRev. – Exp. – Div.Assets= Liabilities +Equity++++=1.+15,000+15,0002.-7,000+7,000Transactions TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH•Softbyte purchases computer equipment for £7,000 cash.

203.+1,600+1,600Trans-actionCash AccountsReceivableSuppliesEquipmentAccountsPayableRetained EarningsRev. – Exp. – Div.Assets= Liabilities +Equity+++++=1.+15,000+15,0002.-7,000+7,000Share CapitalTransactions TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT •Softbyte purchases for £1,600 headsets and other accessories expected to last several months. The supplier allows Softbyte to pay this bill in October.

213.+1,600+1,600Trans-actionCash AccountsReceivableSuppliesEquipmentAccountsPayableRetained EarningsRev. – Exp. – Div.Assets= Liabilities +Equity+++++=1.+15,000+15,0002.-7,000+7,0004.+1,200+1,200Share CapitalTransactions TRANSACTION 4. SERVICES PERFORMED FOR CASH•Softbyte receives £1,200 cash from customers for app development services it has performed.

223.+1,600+1,600Trans-actionCash AccountsReceivableSuppliesEquipmentAccountsPayableRetained EarningsRev. – Exp. – Div.Assets= Liabilities +Equity+++++=1.+15,000+15,0002.-7,000+7,0004.+1,200+1,2005.+250-250Share CapitalTransactions TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT•Softbyte receives a bill for £250 from the Programming News for advertising on its website but postpones payment until a later date.Assets = £17,800Liabilities + Equity = £17,800=

231.Each transaction must be analyzed in terms of its effect on:a.The three components of the basic accounting equation.b.Specific types (kinds) of items within each component.2.The two sides of the equation must always be equal.Summary of transactions

24Accounting systems•Every time there is an event or transaction within the business, it has two effects on the accounting equation.•Not everything the business does will be a transaction that can be recorded in the financial statements. •Every time there is an event or transaction within the business, it has two effects on the accounting equation.•Not everything the business does will be a transaction that can be recorded in the financial statements. InputsInputsProcesses Processes OutputsOutputs•Source documents•Data •Source documents•Data •Record keeping•Ledgers•Journals •Calculations•Record keeping•Ledgers•Journals •Calculations•Reports•Trial balance •Financial statements •Reports•Trial balance •Financial statements Identification Identification Recording Recording CommunicationCommunication

25Basic principles: dual effectAssets Debit CreditBalance Sheet Profit & LossLiabilities Expenses Income Double entry bookkeepingDouble entry bookkeeping is based on the same idea as the accounting equation.Each transaction has a dual effect on the accounting equation so that equality of assets and liability is preserved. Increase Decrease AssetsDebit CreditExpenses Debit CreditLiabilityCredit Debit Income Credit Debit EquityCredit Debit

26At the end of the year, the final balances on all the items can be summed up and presented in the Statement of Financial Position (SoFP)Remember, that the total assets will equal the total liabilities and equityAssets = Liabilities + EquityNow, let’s have an example of SoFP.Statement of financial position

27What the Statement of Financial Positionlooks likeStatement of Financial Position 2023

28Learning activity: transactions exerciseTransactions made by Salah & Co, a public accounting firm, for the month of August are shown below. 1.The company issued ordinary shares for £25,000 cash.2.The company purchased £7,000 of office equipment on credit.3.The company received £8,000 cash in exchange for services performed.4.The company paid £850 for this month’s rent.5.The company paid a dividend of £1,000 in cash to shareholders.Prepare a tabular analysis which shows the effects of these transactions on the expanded accounting equation, similar to those shown in the previous set of slides.10 minutes

29Solution and considerations •Assets = Liabilities + Equity •Dividend = reduction in equity (retained earnings need to be positive)Learning activity1.Trans-actionCash EquipmentAccountsPayableShare CapitalRetained EarningsRev. – Exp. – Div.Assets= Liabilities +Equity+++=2.3.4.5.+++=--

30Solution and considerations •Assets = Liabilities + Equity•Dividend = reduction in equity (retained earnings need to be positive)Learning activity£38,1501.+25,000+25,000Trans-actionCash EquipmentAccountsPayableShare CapitalRetained EarningsRev. – Exp. – Div.Assets= Liabilities +Equity+++=2.+7,000+7,0003.+8,000+8,0004.- 850- 8505.- 1,000-1,000£31,150£7,000£7,000£25,000£8,000£850£1,000+++=--£38,150

By the end of this lecture, you should know: •The main financial statements in Accounting. •The components of statement of financial position. •The Accounting equation. •What do we mean by assets, liabilities and equity of a business?•How to analyse accounting transactions31Summary

Conclusions Next lecturer Feedback and questions Income Statement What did you learn and what were you expecting to learn today?Take your time to read the notes and the chapter and write down questions, we will cover them during the next session. 32

Any questions?THANK YOU! 33