Type of accounts in financial statements

Q.5 EXPLAIN, WHAT TYPE OF ACCOUNTS GO INTO BALANCE SHEET, INCOME

STATEMENT AND STATE OF CASHFLOWS AND HOW THE ACCOUNTS OF ONE
FINANCIAL STATEMENT ARE DIFFERENT FROM OTHER?
Ans:
 BALANCE SHEET
1. A BALANCE SHEET is the financial statement that reports a firm’s financial
condition at a specific time.
2. The term balance sheet implies that the report shows a balance between two
figures.
3. The balance sheet shows a balance between a company’s assets and its liabilities
and owners equity; or: assets = liabilities + owners’ equity
1. The FUNDAMENTAL ACCOUNTING EQUATION is: assets = liabilities +
owners’ equity
2. The fundamental accounting equation is the BASIS FOR THE BALANCE
SHEET.
3. The assets are equal to, or are balanced with, the liabilities and owners’ equity.

 THE ACCOUNTS OF THE BALANCE SHEET.

1. ASSETS are economic resources owned by the company.
a. Assets include productive, tangible items that help generate income, as
well as intangibles of value.
b. LIQUIDITY refers to how fast an assets can be converted into cash.
2. CURRENT ASSETS can be converted to cash within one year.
3. FIXED ASSETS (such as equipment, buildings, and land) are relatively permanent.
4. INTANGIBLE ASSETS (such as patents and copyrights) include items of value such
as patents and copyrights that have no real physical form.

 LIABILITIES AND OWNER’S EQUITY.

1. LIABILITIES are what the business owes to others.
a. CURRENT LIABILITIES are payments due in one year or less.
b. LONG-TERM LIABILITIES are payments not due for one year or longer.
c. ACCOUNTS PAYABLE are monies owed for merchandise and services
purchased on credit but not paid for yet.
d. NOTES PAYABLE, are short-term or long-term promises for future
payment.
e. BONDS PAYABLE are money loaned to the firm that it must pay back.
2. EQUITY.
a. The value of things you own (assets) minus the amount of money you owe
others (liabilities) is called EQUITY.
b. The value of what stockholders own in a firm (minus liabilities) is called
STOCKHOLDERS’ EQUITY (or SHAREHOLDERS’ EQUITY.)
c. The formula for OWNERS’ EQUITY is assets minus liabilities.
d. Businesses not incorporated identify this as a CAPITAL ACCOUNT.

 THE INCOME STATEMENT

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 Type of accounts in financial statements

1. The INCOME STATEMENT is the financial statement that shows a firm’s

profit after costs, expenses, and taxes.
2. It summarizes all of the resources that have come into the firm (revenue), all the
resources that have left the firm, and the resulting net income or loss.
3. NET INCOME or NET LOSS are the revenues left over.
4. The INCOME STATEMENT’S FORMULA: revenue cost of goods sold =
gross margin (gross profit) gross margin (gross profit) net income before taxes net
income before taxes taxes = net income (or loss)
5. The income statement is arranged according to accepted accounting principles
(GAAP)): revenue cost of goods sold gross margin operating expenses net income
before taxes taxes net income (or loss)

 ACCOUNTS OF INCOME STATEMENT

REVENUE is the value of what is received for goods sold, services rendered,
and other financial sources.
1. There is a difference between revenue and sales.
2. Most REVENUE comes from SALES, but OTHER SOURCES OF REVENUE
include rents earned, interest earned, and so forth.
3. Net income can also be called NET EARNINGS, or NET PROFIT.
COST OF GOODS SOLD (COST OF GOODS MANUFACTURED.)
1. COST OF GOODS SOLD (COST OF GOODS MANUFACTURED) measures the
cost of merchandise sold or cost of raw materials or parts and supplies used for
producing items for resale.
2. The cost of goods sold includes the purchase price plus any costs associated with
obtaining and storing the goods.
3. GROSS MARGIN (GROSS PROFIT) is how much the firm earned by buying and
selling or making and selling merchandise.
4. In a service firm, there may be no cost of goods sold.
5. In either case, the gross margin doesn’t tell you everything—you must subtract
expenses.
 OPERATING EXPENSES.
1. EXPENSES are costs involved in operating a business, such as rent, utilities, and
salaries.
2. OPERATING EXPENSES include rent, salaries, supplies, utilities, insurance, and
depreciation of equipment.
3. After all expenses are deducted, the firm’s net income before taxes is determined.
4. After allocating for taxes, you get to the bottom line, the NET INCOME (or
perhaps NET LOSS) the firm incurred from operations.
5. Businesses need to keep track of how much money they earn, spend, how much
cash they have on hand, and so on.

  THE STATEMENT OF CASH FLOWS

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 Type of accounts in financial statements

The STATEMENT OF CASH FLOWS reports cash receipts and disbursement related to the
firm’s major activities

 TYPES OF ACCOUNTS:
A "Cash Flow Statement" shows the sources and uses of cash and is typically divided
into three components:
Operating Cash Flow. Operating cash flow, often referred to as working capital, is the
cash flow generated from internal operations. It comes from sales of the product or
service of your business, and because it is generated internally, it is under your control.
Investing Cash Flow. Investing cash flow is generated internally from non-operating
activities. This includes investments in plant and equipment or other fixed assets,
nonrecurring gains or losses, or other sources and uses of cash outside of normal
operations.
Financing Cash Flow. Financing cash flow is the cash to and from external sources,
such as lenders, investors and shareholders. A new loan, the repayment of a loan, the
issuance of stock, and the payment of dividend are some of the activities that would be
included in this section of the cash flow statement.

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