CHAPTER ONE
FINANCIAL STATEMENTS:
 Provide a picture of profitability and financial position of the business to
management & interested others.
 The two most widely used financial statements are the BALANCE SHEET
(shows financial position) and the INCOME STATEMENT (measures profits
during a period of time.)
THE BALANCE SHEET:

Sample on pg. 16
Shows the financial position of a business AT A PARTICULAR DATE.
HEADING:
WHO- Name of business
WHAT- “Balance Sheet”
WHEN- Date of Balance Sheet
3 Sections
1. ASSETS-listed in order of LIQUIDITY (ease with which it may be turned
into cash)
2. LIABILITIES-listed in the order in which they must be paid
3. OWNER’S EQUITY
ASSETS – Economic resources that are owned by a business and are expected to benefit
future operations
LIABILITES- Debts of the business
ACCOUNTS PAYABLE- the liability (debt) arising from the purchase of goods
or services on credit.
CREDITOR-the person or company to whom the account payable is owed.
NOTE PAYABLE- usually the form of liability when money is borrowed (a
formal written promise to pay a certain amount of money, plus interest at a
definite future time).
OWNER’S EQUITY
pg.20
 Represents the resources invested by the owner
 Equal to Assets-Liabilities
 The owner’s claim against the assets of the business.
 The owner’s equity is a RESIDUAL claim because the claims of the creditors
legally come first
INCREASES IN OWNER’S EQUITY:
1. investment by the owner
2. earnings/profits of the business
DECREASES IN OWNER’S EQUITY:
1. withdrawals of cash or other assets by owner
2. losses from unprofitable operation of the business
THE ACCOUNTING EQUATION
ASS ETS=LIABILITIES + OWNER’S EQUITY
A = L + OE
THE FUNDAMENTAL ACCOUNTING EQUATION
This is why the statement of financial position is called a BALANCE SHEET. (2 sided
balance)
A= L + OE, because:
ASSETS → WHAT RESOURCES THE BUSINESS OWNS.
LIABILITES + OE → WHO SUPPLIED THESE RESOURCES.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP’S)
1. THE CONCEPT OF BUSINESS ENTITY
 This principle states that business entity is an economic unit, which enters
into the business transactions that must be recoded, summarized &
reported
 The entity is regarded as separate from the owner(s)
2. COST PRINCIPLE
 This is the policy of accounting for assets at their acquisition cost not
their market value.
3. THE GOING CONCERN ASSUMPTION
 States that a business will continue to operate until it is known that such
is not the case
 A balance sheet for a business is prepared on this assumption, assets
were acquired for USE, not resale, and therefore, they are listed at cost.
4. OBJECTIVITY PRINCIPLE
 States that accounting will be recorded on the basis of objective
evidence, i.e. source documents not personal opinions.
 Another reason balance sheets are prepared using costs rather than
market values for assets.
FORMS OF BUSINESS ORGANIZATION
1. SINGLE OR SOLE PROPRIETORSHIP
 Owned by one person
 Owner personally liable for debts of business
 Most common business form
 Common for small retail stores, service businesses, professional practices
in law, medicine, etc…
 Unlimited liability
2. PARTNERSHIPS
 Like sole proprietorship, except owned by two or more people
3. CORPORATIONS
 A legal entity, separate & distinct from tits owner’s
 Owners are not liable for the corp.’s debts (limited liability)
 Name of company ends in CORP.INC/LTD.
 Owners are called ‘shareholders’
BALANCE SHEETS FOR THE THREE TYPES OF ORGANIZATION


Assets & Liabilities are presented in the same manner.
Owner’s equity section differs (see page 28-29 for examples)
FOR A CORPORATION:
Shareholders’ equity:
CAPTIAL STOCK=amount of owners’ original investment
RETAINED EARNINGS=amount of profits or losses (less any dividends paid out)
accumulated since the formation of the business.
i.e. Earning not paid out in dividends
OUTSIDERS WHO USE FINANCIAL STATEMENTS
BANKERS & OTHER CREDITORS
OWNERS
GOVERNMENT
EMPLOYEES
INVESTORS
Why? For decision making purposes. See pages 29-31