Single-Entry Bookkeeping System: Advantages

Single-entry bookkeeping system
A single-entry bookkeeping system or single-entry accounting system is a method of

bookkeeping relying on a one sided accounting entry to maintain financial information. It's also
known as incomplete or unscientific method for recording transactions.
Most businesses maintain a record of all transactions based on the double-entry bookkeeping
system. However, many smaller businesses maintain only a single-entry system that records the
"bare essentials." In some cases, only records of cash, accounts receivable, accounts payable and
taxes paid may be maintained.
This type of accounting system with additional information can typically be compiled into an
income statement and statement of affairs by a professional accountant.
Advantages
Single-entry systems are used in the interest of simplicity. If a double-entry system is needed,
then the services of a trained person are often required.
According to the Internal Revenue Service, a single-entry system is based on the income
statement (profit or loss statement). It can be a simple and practical system if you are starting a
small business.[1]
Additionally, the IRS states:
1. The single entry system of record keeping does not include equal debit and credit to the
balance sheet and income statement accounts. A single-entry accounting system is not
self-balancing. Mathematical errors in the account totals are thus common. Reconciliation
of the books and records to the return is an important audit step.
2. A single-entry system may consist only of transactions posted in a notebook, daybook, or
journal. However, it may include a complete set of journals and a ledger providing
accounts for all important items.
3. A single-entry system for a small shell and ledgers show debit and credit balances.
Disadvantages
1. Data may not be available to management for effectively planning and controlling the
business.
2. Lack of systematic and precise bookkeeping may lead to inefficient administration and
reduced control over the affairs of the business.
3. Single-entry record administration of those assets may occur.
4. Theft and other losses are less likely to be detected.
Double-entry bookkeeping system

Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every
entry to an account requires a corresponding and opposite entry to a different account. The
double-entry has two equal and corresponding sides known as debit and credit. The left-hand
side is debit and right-hand side is credit. For instance, recording a sale of $100 might require
two entries: a debit of $100 to an account named "Cash" and a credit of $100 to an account
named "Revenue."[further explanation needed]
The accounting equation
is an error detection tool; if at any point the sum of debits for all accounts does not equal the
corresponding sum of credits for all accounts, an error has occurred. However, satisfying the
equation does not guarantee that there are no errors; the ledger may still "balance" even if the
wrong ledger accounts have been debited or credited.
History
Main article: Accounting
Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle
East.[1] Jewish bankers in Old Cairo, for example, used a double-entry bookkeeping system
which predated the known usage of such a form in Italy, and whose records remain from the 11th
century AD. It has been hypothesized that Italian merchants likely learned the method from their
interaction with ancient Indian merchants from the sea trade; the double-entry system was
founded on a "Jama–Nama" system which had debits and credits in a reverse order.[2] The oldest
European record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts
of the Republic of Genoa in 1340. The Messari accounts contain debits and credits journalised in
a bilateral form, and include balances carried forward from the preceding year, and therefore
enjoy general recognition as a double-entry system.[3] By the end of the 15th century, the bankers
and merchants of Florence, Genoa, Venice and Lübeck used this system widely.
However, the double-entry accounting method was said to be developed independently earlier in
Korea during the Goryeo dynasty (918–1392) when Kaesong was a center of trade and industry
at that time. The Four-element bookkeeping system was said to be originated in the 11th or 12th
century.[4][5][6]
The earliest extant accounting records that follow the modern double-entry system in Europe
come from Amatino Manucci, a Florentine merchant at the end of the 13th century.[7] Manucci
was employed by the Farolfi firm and the firm's ledger of 1299-1300 evidences full double-entry
bookkeeping. Giovannino Farolfi & Company, a firm of Florentine merchants headquartered in
Nîmes, acted as moneylenders to the Archbishop of Arles, their most important customer.[8]
Some sources[which?] suggest that Giovanni di Bicci de' Medici introduced this method for the
Medici bank in the 14th century.
Ragusan economist Benedetto Cotrugli's 1458 treatise Della mercatura e del mercante perfetto
contained the earliest known description of a double-entry bookkeeping system, but his
manuscript was not officially published until 1573.[9][10]
Luca Pacioli, a Franciscan friar and collaborator of Leonardo da Vinci, first codified the system
in his mathematics textbook Summa de arithmetica, geometria, proportioni et proportionalità
published in Venice in 1494.[11] Pacioli is often called the "father of accounting" because he was
the first to publish a detailed description of the double-entry system, thus enabling others to
study and use it.[12][13][14]
In pre-modern Europe, double-entry bookkeeping had theological and cosmological

connotations, recalling "both the scales of justice and the symmetry of God's world".[15]
Accounting entries
In the double-entry accounting system, at least two accounting entries are required to record each
financial transaction. These entries may occur in asset, liability, equity, expense, or revenue
accounts. Recording of a debit amount to one or more accounts and an equal credit amount to
one or more accounts results in total debits being equal to total credits for all accounts in the
general ledger. If the accounting entries are recorded without error, the aggregate balance of all
accounts having Debit balances will be equal to the aggregate balance of all accounts having
Credit balances. Accounting entries that debit and credit related accounts typically include the
same date and identifying code in both accounts, so that in case of error, each debit and credit
can be traced back to a journal and transaction source document, thus preserving an audit trail.
The accounting entries are recorded in the "Books of Accounts". Regardless of which accounts
and how many are impacted by a given transaction, the fundamental accounting equation of
assets equal liabilities plus capital will hold.
Approaches
There are two different ways to memorize the effects of debits and credits on accounts in the
double-entry system of bookkeeping. They are the Traditional Approach and the Accounting
Equation Approach. Irrespective of the approach used, the effect on the books of accounts
remains the same, with two aspects (debit and credit) in each of the transactions.
Traditional approach
Following the Traditional Approach (also called the British Approach) accounts are classified as
real, personal, and nominal accounts.[16] Real accounts are accounts relating to assets and
liabilities including the capital account of the owners. Personal accounts are accounts relating to
persons or organisations with whom the business has transactions and will mainly consist of
accounts of debtors and creditors. Nominal accounts are revenue, expenses, gains, and losses.
Transactions are entered in the books of accounts by applying the following golden rules of
accounting:
1. Real account: Debit what comes in and credit what goes out.
2. Personal account: Debit the receiver and credit the giver.
3. Nominal account: Debit all expenses & losses and credit all incomes & gains[17][18]
Accounting equation approach
This approach is also called the American approach. Under this approach transactions are
recorded based on the accounting equation, i.e., Assets = Liabilities + Capital.[16] The accounting
equation is a statement of equality between the debits and the credits. The rules of debit and
credit depend on the nature of an account. For the purpose of the accounting equation approach,
all the accounts are classified into the following five types: assets, liabilities, income/revenues,
expenses, or capital gains/losses.
If there is an increase or decrease in a set of accounts, there will be equal decrease or increase in
another set of accounts. Accordingly, the following rules of debit and credit hold for the various
categories of accounts:
1. Assets Accounts: debit entry represents an increase in assets and a credit entry represents a
decrease in assets.
2. Capital Account: credit entry represents an increase in capital and a debit entry represents a
decrease in capital.
3. Liabilities Accounts: credit entry represents an increase in liabilities and a debit entry represents
a decrease in liabilities.
4. Revenues or Incomes Accounts: credit entry represents an increase in incomes and gains, and
debit entry represents a decrease in incomes and gains.
5. Expenses or Losses Accounts: debit entry represents an increase in expenses and losses, and
credit entry represents a decrease in expenses and losses.
These five rules help learning about accounting entries and also are comparable with traditional
(British) accounting rules.
Books of accounts
This section does not cite any sources. Please help improve this section by adding citations to
reliable sources. Unsourced material may be challenged and removed. (October 2014) (Learn how
and when to remove this template message)
Each financial transaction is recorded in at least two different nominal ledger accounts within the
financial accounting system, so that the total debits equals the total credits in the general ledger,
i.e. the accounts balance. This is a partial check that each and every transaction has been
correctly recorded. The transaction is recorded as a "debit entry" (Dr) in one account, and a
"credit entry" (Cr) in a second account. The debit entry will be recorded on the debit side (left-
hand side) of a general ledger account, and the credit entry will be recorded on the credit side
(right-hand side) of a general ledger account. If the total of the entries on the debit side of one
account is greater than the total on the credit side of the same nominal account, that account is
said to have a debit balance.
Double entry is used only in nominal ledgers. It is not used in daybooks (journals), which
normally do not form part of the nominal ledger system. The information from the daybooks will
be used in the nominal ledger and it is the nominal ledgers that will ensure the integrity of the
resulting financial information created from the daybooks (provided that the information
recorded in the daybooks is correct).
The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks
can be totalled before they are entered in the nominal ledger. If there are only a relatively small
number of transactions it may be simpler instead to treat the daybooks as an integral part of the
nominal ledger and thus of the double-entry system.
However, as can be seen from the examples of daybooks shown below, it is still necessary to
check, within each daybook, that the postings from the daybook balance.
The double entry system uses nominal ledger accounts. From these nominal ledger accounts a
trial balance can be created. The trial balance lists all the nominal ledger account balances. The
list is split into two columns, with debit balances placed in the left hand column and credit
balances placed in the right hand column. Another column will contain the name of the nominal
ledger account describing what each value is for. The total of the debit column must equal the
total of the credit column.
Debits and credits

Main article: Debits and credits
Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses,
the following (basic) equation must be true:
assets = liabilities + equity
For the accounts to remain in balance, a change in one account must be matched with a change in
another account. These changes are made by debits and credits to the accounts. Note that the
usage of these terms in accounting is not identical to their everyday usage. Whether one uses a
debit or credit to increase or decrease an account depends on the normal balance of the account.
Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal
balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have
a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on
the right side for each account. Since the accounts must always balance, for each transaction
there will be a debit made to one or several accounts and a credit made to one or several
accounts. The sum of all debits made in each day's transactions must equal the sum of all credits
in those transactions. After a series of transactions, therefore, the sum of all the accounts with a
debit balance will equal the sum of all the accounts with a credit balance.
Debits and credits are numbers recorded as follows:
 Debits are recorded on the left side of a ledger account, a.k.a. T account. Debits increase
balances in asset accounts and expense accounts and decrease balances in liability accounts,
revenue accounts, and capital accounts.
 Credits are recorded on the right side of a T account in a ledger. Credits increase balances in
liability accounts, revenue accounts, and capital accounts, and decrease balances in asset
accounts and expense accounts.
 Debit accounts are asset and expense accounts that usually have debit balances, i.e. the total
debits usually exceed the total credits in each debit account.
 Credit accounts are revenue (income, gains) accounts and liability accounts that usually have
credit balances.
Debit Credit
Asset Increase Decrease
Liability Decrease Increase
Income (revenue) Decrease Increase
Expense Increase Decrease
Capital Decrease Increase

The mnemonic DEADCLIC is used to help remember the effect of debit or credit transactions
on the relevant accounts. DEAD: Debit to increase Expense, Asset and Drawing accounts and
CLIC: Credit to increase Liability, Income and Capital accounts.
The account types are related as follows:

current equity = sum of equity changes across time (increases on the left side are debits, and
increases on the right side are credits, and vice versa for decreases)
current equity = Assets - Liabilities
sum of equity changes across time = owner's investment (Capital above) + Revenues - Expenses
Debits and credits
In double entry bookkeeping, debits and credits (abbreviated Dr and Cr, respectively) are
entries made in account ledgers to record changes in value resulting from business transactions.
Generally speaking (in T-Account terms), if cash is spent in a business transaction, the cash
account is credited (that is, an entry is made on the right side of the T-Account's ledger), and
conversely, when cash is obtained in a business transaction, it is described as a debit (that is, an
entry is made on the left side of the T-Account's ledger). Debits and Credits can occur in any
account. For simplicity it is often best to view Debits as positive numbers and Credits as negative
numbers. When all the debits and credits that are transacted in each account are added up the
resulting account total could be a net Debit (positive number) or a net Credit (negative number).
If the total of the account is in a net Debit position (positive), it is generally classified in the
Asset section of the balance sheet, whereas accounts that total to a net Credit (negative) are
shown in the liability section of the balance sheet. Accounts that relate to the company's profit
(example: Sales, Cost of Sales, Expenses) are totaled to yield company earnings and are
classified in the Equity section of the balance sheet. When recording incoming cash (revenue) a
Debit will be made to Cash or equivalent Assets and a Credit will be made on the revenue
account in the income statement. If a company has a positive Net Income, the Retained Earnings
will receive a Credit when closing out the Income Statement for the year, while a Net Loss will
result in a Debit to the Retained Earnings. A net Credit (negative) balance in Retained Earnings
in the Equity Section demonstrates that the company has been profitable over time, whereas a
Debit (positive) balance in the Equity section, would demonstrate that the company has been
unprofitable. In most companies the following accounts end-up in Credit positions: accounts
payable, share capital, loans payable; while Debit accounts typically include Equipment,
Inventory, Accounts Receivable. Debits (positive numbers) must equal Credits (negatives) in
each transaction; individual transactions may require multiple debit and credit entries.[1][2]
For the company as a whole, the net position of every account (debit or credit) is shown in the
trial balance report. The trial balance report must add to zero; otherwise an error has
occurred.[citation needed]
Accountants group accounts from the trial balance report to prepare financial statements.[citation
needed]
History
The first known recorded use of the terms is Venetian Luca Pacioli's 1494 work, Summa de
Arithmetica, Geometria, Proportioni et Proportionalita (translated: Everything That Is Known
About Arithmetic, Geometry, Proportions and Proportionality). Pacioli devoted one section of
his book to documenting and describing the double-entry bookkeeping system in use during the
Renaissance by Venetian merchants, traders and bankers. This system is still the fundamental
system in use by modern bookkeepers.[3] Indian merchants had developed a double-entry
bookkeeping system, called bahi-khata, predating Pacioli's work by at least many centuries,[4]
and which was likely a direct precursor of the European adaptation.[5]
It is sometimes said that, in its original Latin, Pacioli's Summa used the Latin words debere (to
owe) and credere (to entrust) to describe the two sides of a closed accounting transaction. Assets
were owed to the owner and the owners' equity was entrusted to the company. At the time
negative numbers were not in use. When his work was translated, the Latin words debere and
credere became the English debit and credit. Under this theory, the abbreviations Dr (for debit)
and Cr (for credit) derive directly from the original Latin.[6] However, Sherman[7] casts doubt on
this idea because Pacioli uses Per (Latin for "through") for the debtor and A (Latin for "to") for
the creditor in the Journal entries. Sherman goes on to say that the earliest text he found that
actually uses "Dr." as an abbreviation in this context was an English text, the third edition (1633)
of Ralph Handson's book Analysis or Resolution of Merchant Accompts[8] and that Handson uses
Dr. as an abbreviation for the English word "debtor." (Sherman could not locate a first edition,
but speculates that it too used Dr. for debtor.) The words actually used by Pacioli for the left and
right sides of the Ledger are "in dare" and "in havere" (give and receive).[9] Geijsbeek the
translator suggests in the preface:
'if we today would abolish the use of the words debit and credit in the ledger and substitute the
ancient terms of "shall give" and "shall have" or "shall receive", the personification of accounts
in the proper way would not be difficult and, with it, bookkeeping would become more
intelligent to the proprietor, the layman and the student.'[10]
As Jackson has noted, "debtor" need not be a person, but can be an abstract operator (cf.
"divisor" in math):
"...it became the practice to extend the meanings of the terms ... beyond their original personal
connotation and apply them to inanimate objects and abstract conceptions..."[11]
Aspects of transactions
To determine whether one must debit or credit a specific account we use either the accounting
equation approach which consists of five accounting rules[12] or the classical approach based on
three rules (for Real accounts, Personal accounts, and Nominal accounts) to determine whether
to debit or to credit an account.[13]
 Real accounts are the assets of a firm, which may be tangible (machinery, buildings etc.) or
intangible (goodwill, patents etc.)
 Personal accounts relate to individuals, companies, creditors, banks etc.
 Nominal accounts relate to expenses, losses, incomes or gains.
Whether a debit increases or decreases an account depends on what kind of account it is. The
basic principle is that the account receiving benefit is debited and giving benefit is credited. For
instance, an increase in an asset account is a debit. An increase in a liability or an equity account
is a credit.
The rules in classical approach is known as golden rules of accounting. The rules are the
following for each type of account:[14]
 Real accounts: Debit whatever comes in and, credit whatever goes out.
 Personal accounts: Receiver's account is debited, and giver's account is credited.
 Nominal accounts: All expenses and losses are debited and, all incomes and gains are credited.
The complete accounting equation based on modern approach is very easy to remember if you
focus on Assets, Expenses, Costs, Dividends (highlighted in chart). All those account types
increase with debits or left side entries. Conversely, a decrease to any of those accounts is a
credit or right side entry. On the other hand, increases in revenue, liability or equity accounts are
credits or right side entries, and decreases are left side entries or debits.
Kind of account Debit Credit
Asset Increase Decrease
Liability Decrease Increase
Income/Revenue Decrease Increase
Expense/Cost/Dividend Increase Decrease
Equity/Capital Decrease Increase
Debits and credits occur simultaneously in every financial transaction in double-entry

bookkeeping. In the accounting equation, Assets = Liabilities + Equity, so, if an asset account
increases (a debit (left)), then either another asset account must decrease (a credit (right)), or a
liability or equity account must increase (a credit (right)). Note also that in the extended
equation, revenues increase equity and expenses, costs & dividends decrease equity, so their
difference is the impact on the equation.
For example, if a company provides a service to a customer who does not pay immediately, the
company records an increase in assets, Accounts Receivable with a debit entry, and an increase
in Revenue, with a credit entry. When the company receives the cash from the customer, two
accounts again change on the company side, the cash account is debited (increased) and the
Accounts Receivable account is now decreased (credited). When the cash is deposited to the
bank account, two things also change, on the bank side: the bank records an increase in its cash
account (debit) and records an increase in its liability to the customer by recording a credit in the
customer's account (which is not cash). Note that, technically, the deposit is not a decrease in the
cash (asset) of the company and should not be recorded as such. It is just a transfer to a proper
bank account of record in the company's books, not affecting the ledger.
To make it more clear, the bank views the transaction from a different perspective but follows
the same rules: the bank's vault cash (asset) increases, which is a debit; the increase in the
customer's account balance (liability from the bank's perspective) is a credit. A customer's
periodic bank statement generally shows transactions from the bank's perspective, with cash
deposits characterized as credits (liabilities) and withdrawals as debits (reductions in liabilities)
in depositor's accounts. In the company's books the exact opposite entries should be recorded to
account for the same cash. This concept is important since this is why so many people
misunderstand what debit/credit really means.
In summary, debits are simply transaction entries on the left-hand side of ledger accounts, and
credits are entries on the right-hand side.
Commercial understanding
When setting up the accounting for a new business, a number of accounts are established to
record all business transactions that are expected to occur. Typical accounts that relate to almost
every business are: Cash, Accounts Receivable, Inventory, Accounts Payable and Retained
Earnings. Each account can be broken down further, to provide additional detail as necessary.
For example: Accounts Receivable can be broken down to show each customer that owes the
company money. In simplistic terms, if Bob, Dave, and Roger owe the company money, the
Accounts Receivable account will contain a separate account for Bob, and Dave and Roger. All 3
of these accounts would be added together and shown as a single number (i.e. total 'Accounts
Receivable' - balance owed) on the balance sheet. All accounts for a company are grouped
together and summarized on the balance sheet in 3 sections which are: Assets, Liabilities and
Equity.
All accounts must first be classified as one of the five types of accounts (accounting elements) (
asset, liability, equity, income and expense). To determine how to classify an account into one of
the five elements, the definitions of the five account types must be fully understood. The
definition of an asset according to IFRS is as follows, "An asset is a resource controlled by the
entity as a result of past events from which future economic benefits are expected to flow to the
entity".[15] In simplistic terms, this means that Assets are accounts viewed as having a future
value to the company (i.e. cash, accounts receivable, equipment, computers). Liabilities,
conversely, would include items that are obligations of the company (i.e. loans, accounts
payable, mortgages, debts).
The Equity section of the balance sheet typically shows the value of any outstanding shares that
have been issued by the company as well as its earnings. All Income and expense accounts are
summarize in the Equity Section in one line on the balance sheet called Retained Earnings. This
account, in general, reflects the cumulative profit (retained earnings) or loss (retained deficit) of
the company.
The Profit and Loss Statement is an expansion of the Retained Earnings Account. It breaks-out
all the Income and expense accounts that were summarized in Retained Earnings. The Profit and
Loss report is important in that it shows the detail of sales, cost of sales, expenses and ultimately
the profit of the company. Most companies rely heavily on the profit and loss report and review
it regularly to enable strategic decision making.
Terminology
The words debit and credit can sometimes be confusing because they depend on the point of
view from which a transaction is observed. In accounting terms, assets are recorded on the left-
hand side (debit) of asset accounts, because they are typically shown on the left-hand side of the
accounting equation (A=L+SE). Likewise, an increase in liabilities and shareholder's equity are
recorded on the right-hand side (credit) of those accounts, thus they also maintain the balance of
the accounting equation. In other words, if "assets are increased with left-hand entries, the
accounting equation is balanced only if increases in liabilities and shareholder’s equity are
recorded on the opposite or right-hand side. Conversely, decreases in assets are recorded on the
right-hand side of asset accounts, and decreases in liabilities and equities are recorded on the left-
hand side". Similar is the case with revenues and expenses, what increases shareholder's equity is
recorded as credit because they are in the right side of equation and vice versa.[16] Typically,
when reviewing the financial statements of a business, Assets are Debits and Liabilities and
Equity are Credits. For example, when two companies transact with one another say Company A
buys something from Company B then Company A will record a decrease in cash (a Credit), and
Company B will record an increase in cash (a Debit). The same transaction is recorded from two
different perspectives.
This use of the terms can be counter-intuitive to people unfamiliar with bookkeeping concepts,
who may always view a credit as an increase and a debit as a decrease. This is because most
people typically only see bank accounts and billing statements (e.g., from a utility). A depositor's
bank account is actually a Liability to the bank, because the bank holds money which legally
belongs to the depositor, so that the bank owes the money to the depositor. Thus, when the
customer deposits money into the account, the bank credits the account (increases the bank's
liability). At the same time, the bank adds the money to its own cash holdings account. Since the
latter account is an Asset, the increase is a debit. But the customer typically does not see this side
of the transaction.
On the other hand, when a utility customer pays a bill or the utility corrects an overcharge, the
customer's account is credited. This is because the customer's account is one of the utility's
accounts receivable, which are Assets to the utility because they represent money the utility can
expect to receive from the customer in the future. Credits actually decrease Assets (the utility is
now owed less money). If the credit is due to a bill payment, then the utility will add the money
to its own cash account, which is a debit because the account is another Asset. Again, the
customer views the credit as an increase in the customer's own money and does not see the other
side of the transaction.
The simplest most effective way to understand Debits and Credits is by actually recording them
as positive and negative numbers directly on the balance sheet. If you receive $100 cash, put
$100 (debit/Positive) next to the Cash account. If you spend $100 cash, put -$100
(credit/Negative) next to the cash account. The next step would be to balance that transaction
with the opposite sign so that your balance sheet adds to zero. The way of doing these
placements are simply a matter of understanding where the money came from and where it goes
in the specific account types (like Liability and net assets account). So if $100 Cash came in and
you Debited/Positive next to the Cash Account, then the next step is to determine where the -
$100 is classified. If you got it as a loan then the -$100 would be recorded next to the Loan
Account. If you received the $100 because you sold something then the $-100 would be recorded
next to the Retained Earnings Account. If everything is viewed in terms of the balance sheet, at a
very high level, then picking the accounts to make your balance sheet add to zero is the picture.
At the end of any financial period (say at the end of the quarter or the year), the net debit or
credit amount is referred to as the accounts balance. If the sum of the debit side is greater than
the sum of the credit side, then the account has a "debit balance". If the sum of the credit side is
greater, then the account has a "credit balance". If debits and credits equal each, then we have a
"zero balance". Accounts with a net Debit balance are generally shown as Assets, while accounts
with a net Credit balance are generally shown as Liabilities. The equity section and retained
earnings account, basically reference your profit or loss. Therefore, that account can be positive
or negative (depending on if you made money). When you add Assets, Liabilities and Equity
together (using positive numbers to represent Debits and negative numbers to represent Credits)
the sum should be Zero.
Debit cards and credit cards
Debit cards and credit cards are creative terms used by the banking industry to market and
identify each card.[17] From the cardholder's point of view, a credit card account normally
contains a credit balance, a debit card account normally contains a debit balance. A debit card is
used to make a purchase with one's own money. A credit card is used to make a purchase by
borrowing money.[18]
From the bank's point of view, when a debit card is used to pay a merchant, the payment causes a
decrease in the amount of money the bank owes to the cardholder. From the bank's point of view,
your debit card account is the bank's liability. A decrease to the bank's liability account is a debit.
From the bank's point of view, when a credit card is used to pay a merchant, the payment causes
an increase in the amount of money the bank is owed by the cardholder. From the bank's point of
view, your credit card account is the bank's asset. An increase to the bank's asset account is a
debit. Hence, using a debit card or credit card causes a debit to the cardholder's account in either
situation when viewed from the bank's perspective.
General ledgers
General ledger is the term for the comprehensive collection of T-accounts (it is so called because
there was a pre-printed vertical line in the middle of each ledger page and a horizontal line at the
top of each ledger page, like a large letter T). Before the advent of computerised accounting,
manual accounting procedure used a book (known as a ledger) for each T-account. The
collection of all these books was called the general ledger. The chart of accounts is the table of
contents of the general ledger. Totaling of all debits and credits in the general ledger at the end of
a financial period is known as trial balance.
"Day Books" or journals are used to list every single transaction that took place during the day,
and the list is totalled at the end of the day. These daybooks are not part of the double-entry
bookkeeping system. The information recorded in these daybooks is then transferred to the
general ledgers. Modern computer software now allows for the instant update of each ledger
account – for example, when recording a cash receipt in a cash receipts journal a debit is posted
to a cash ledger account with a corresponding credit in the ledger account for which the cash was
received. Not every single transaction need be entered into a T-account. Usually only the sum of
the book transactions (a batch total) for the day is entered in the general ledger.
The five accounting elements

There are five fundamental elements[12] within accounting. These elements are as follows:
Assets, Liabilities, Equity (or Capital), Income (or Revenue) and Expenses. The five accounting
elements are all affected in either a positive or negative way. A credit transaction does not
always dictate a positive value or increase in a transaction and similarly, a debit does not always
indicate a negative value or decrease in a transaction. An asset account is often referred to as a
"debit account" due to the account's standard increasing attribute on the debit side. When an
asset (e.g. an espresso machine) has been acquired in a business, the transaction will affect the
debit side of that asset account illustrated below:
Asset
Debits (Dr) Credits (Cr)
The "X" in the debit column denotes the increasing effect of a transaction on the asset account
balance (total debits less total credits), because a debit to an asset account is an increase. The
asset account above has been added to by a debit value X, i.e. the balance has increased by £X or
$X. Likewise, in the liability account below, the X in the credit column denotes the increasing
effect on the liability account balance (total credits less total debits), because a credit to a
liability account is an increase.
All "mini-ledgers" in this section show standard increasing attributes for the five elements of
accounting.
Liability
Income
Expenses
Equity
Summary table of standard increasing and decreasing attributes for the accounting elements:
ACCOUNT TYPE DEBIT CREDIT
Asset + −
Expense + −
+ −
Dividends
Liability − +
Revenue − +
Common shares − +
Retained earnings − +
Attributes of accounting elements per real, personal, and nominal accounts
Real accounts are assets. Personal accounts are liabilities and owners' equity and represent
people and entities that have invested in the business. Nominal accounts are revenue, expenses,
gains, and losses. Accountants close nominal accounts at the end of each accounting period.[19]
This method is used in the United Kingdom, where it is simply known as the Traditional
approach.[13]
Transactions are recorded by a debit to one account and a credit to another account using these
three "golden rules of accounting":
1. Real account: Debit what comes in and credit what goes out
2. Personal account: Debit who receives and Credit who gives.
3. Nominal account: Debit all expenses & losses and Credit all incomes & gains
Debit Credit
Real (assets) Increase Decrease
Personal (liability) Decrease Increase
Personal (owner's equity) Decrease Increase
Nominal (revenue) Decrease Increase
Nominal (expenses) Increase Decrease
Nominal (gain) Decrease Increase
Nominal (loss) Increase Decrease
Principle
Each transaction that takes place within the business will consist of at least one debit to a specific
account and at least one credit to another specific account. A debit to one account can be
balanced by more than one credit to other accounts, and vice versa. For all transactions, the total
debits must be equal to the total credits and therefore balance.
The general accounting equation is as follows:
Assets = Equity + Liabilities,[20]
A = E + L.
The equation thus becomes A – L – E = 0 (zero). When the total debts equals the total credits for
each account, then the equation balances.
The extended accounting equation is as follows:
Assets + Expenses = Equity/Capital + Liabilities + Income,
A + Ex = E + L + I.
In this form, increases to the amount of accounts on the left-hand side of the equation are
recorded as debits, and decreases as credits. Conversely for accounts on the right-hand side,
increases to the amount of accounts are recorded as credits to the account, and decreases as
debits.
This can also be rewritten in the equivalent form:
Assets = Liabilities + Equity/Capital + (Income − Expenses),
A = L + E + (I − Ex),
where the relationship of the Income and Expenses accounts to Equity and profit is a bit
clearer.[21] Here Income and Expenses are regarded as temporary or nominal accounts which
pertain only to the current accounting period whereas Asset, Liability, and Equity accounts are
permanent or real accounts pertaining to the lifetime of the business.[22] The temporary accounts
are closed to the Equity account at the end of the accounting period to record profit/loss for the
period. Both sides of these equations must be equal (balance).
Each transaction is recorded in a ledger or "T" account, e.g. a ledger account named "Bank" that
can be changed with either a debit or credit transaction.
In accounting it is acceptable to draw-up a ledger account in the following manner for

representation purposes:
Bank

Accounts pertaining to the five accounting elements
Accounts are created/opened when the need arises for whatever purpose or situation the entity
may have. For example, if your business is an airline company they will have to purchase
airplanes, therefore even if an account is not listed below, a bookkeeper or accountant can create
an account for a specific item, such as an asset account for airplanes. In order to understand how
to classify an account into one of the five elements, a good understanding of the definitions of
these accounts is required. Below are examples of some of the more common accounts that
pertain to the five accounting elements:
Asset accounts
Asset accounts are economic resources which benefit the business/entity and will continue to do
so.[23] They are Cash, bank, accounts receivable, inventory, land, buildings/plant, machinery,
furniture, equipment, supplies, vehicles, trademarks and patents, goodwill, prepaid expenses,
prepaid insurance, debtors (people who owe us money, due within one year), VAT input etc.
Two types of basic asset classification:[24]
 Current assets: Assets which operate in a financial year or assets that can be used up, or
converted within one year or less is called current assets. For example, Cash, bank, accounts
receivable, inventory (people who owe us money, due within one year), prepaid expenses,
prepaid insurance, VAT input and many more.
 Non-current assets: Assets that are not recorded in transactions or hold for more than one year
or in an accounting period is called Non-current assets. For example, land, buildings/plant,
machinery, furniture, equipment, vehicles, trademarks and patents, goodwill etc.
Liability accounts
Liability accounts record debts or future obligations a business or entity owes to others. When
one institution borrows from another for a period of time, the ledger of the borrowing institution
categorises the argument under liability accounts.[25]
The basic classifications of liability accounts are:
 Current liability, when money only may be owed for the current accounting period or periodical.
Examples include accounts payable, salaries and wages payable, income taxes, bank overdrafts,
accrued expenses, sales taxes, advance payments (unearned revenue), debt and accrued
interest on debt, customer deposits, VAT output, etc.
 Long-term liability, when money may be owed for more than one year. Examples include trust
accounts, debenture, mortgage loans and more.
Equity accounts
Equity accounts record the claims of the owners of the business/entity to the assets of that
business/entity.[26] Capital, retained earnings, drawings, common stock, accumulated funds, etc.
Income/revenue accounts
Income accounts record all increases in Equity other than that contributed by the owner/s of the
business/entity.[27] Services rendered, sales, interest income, membership fees, rent income,
interest from investment, recurring receivables,donation etc.
Expense accounts
Expense accounts record all decreases in the owners' equity which occur from using the assets or
increasing liabilities in delivering goods or services to a customer - the costs of doing
business.[28] Telephone, water, electricity, repairs, salaries, wages, depreciation, bad debts,
stationery, entertainment, honorarium, rent, fuel, utility, interest etc.
Example
Quick Services business purchases a computer for £500, on credit, from ABC Computers.
Recognize the following transaction for Quick Services in a ledger account (T-account):
Quick Services has acquired a new computer which is classified as an asset within the business.
According to the accrual basis of accounting, even though the computer has been purchased on
credit, the computer is already the property of Quick Services and must be recognised as such.
Therefore, the equipment account of Quick Services increases and is debited:
Equipment (Asset)
(Dr) (Cr)
500
As the transaction for the new computer is made on credit, the payable "ABC Computers" has
not yet been paid. As a result, a liability is created within the entity's records. Therefore, to
balance the accounting equation the corresponding liability account is credited:
Payable ABC Computers (Liability)
(Dr) (Cr)
500
The above example can be written in journal form:
Dr Cr
Equipment 500
ABC Computers (Payable) 500
The journal entry "ABC Computers" is indented to indicate that this is the credit transaction. It is
accepted accounting practice to indent credit transactions recorded within a journal.
In the accounting equation form:
A = E + L,
500 = 0 + 500 (the accounting equation is therefore balanced).
Further examples
1. A business pays rent with cash: You increase rent (expense) by recording a debit transaction,
and decrease cash (asset) by recording a credit transaction.
2. A business receives cash for a sale: You increase cash (asset) by recording a debit transaction,
and increase sales (income) by recording a credit transaction.
3. A business buys equipment with cash: You increase equipment (asset) by recording a debit
transaction, and decrease cash (asset) by recording a credit transaction.
4. A business borrows with a cash loan: You increase cash (asset) by recording a debit transaction,
and increase loan (liability) by recording a credit transaction.
5. A business pays salaries with cash: You increase salary (expenses) by recording a debit
transaction, and decrease cash (asset) by recording a credit transaction.
6. The totals show the net effect on the accounting equation and the double-entry principle,
where the transactions are balanced.
Account Debit (Dr) Credit (Cr)
1. Rent (Ex) 100
Bank (A) 100
2. Bank (A) 50
Sales (I) 50
3. Equipment (A) 5200
Bank (A) 5200
4. Bank (A) 11000
Loan (L) 11000
5. Salary (Ex) 5000
Bank (A) 5000
6. Total (Dr) $21350
Total (Cr) $21350
T-accounts
The process of using debits and credits creates a ledger format that resembles the letter "T".[29]
The term "T-account" is accounting jargon for a "ledger account" and is often used when
discussing bookkeeping.[30] The reason that a ledger account is often referred to as a T-account is
due to the way the account is physically drawn on paper (representing a "T"). The left column of
the "T" is for Debit (Dr) transactions, while the right column is for Credit (Cr) transactions.

Contra account
All accounts also can be debited or credited depending on what transaction has taken place e.g.,
when a vehicle is purchased using cash, the asset account "Vehicles" is debited as the vehicle
account increases, and simultaneously the asset account "Bank or Cash" is credited due to the
payment for the vehicle using cash. Some balance sheet items have corresponding contra
accounts, with negative balances, that offset them. Examples are accumulated depreciation
against equipment, and allowance for bad debts (also known as allowance for doubtful accounts)
against accounts receivable.[31] United States GAAP utilizes the term contra for specific accounts
only and doesn't recognize the second half of a transaction as a contra, thus the term is restricted
to accounts that are related. For example, sales returns and allowance and sales discounts are
contra revenues with respect to sales, as the balance of each contra (a debit) is the opposite of
sales (a credit). To understand the actual value of sales, one must net the contras against sales,
which gives rise to the term net sales (meaning net of the contras).[32]
A more specific definition in common use is an account with a balance that is the opposite of the
normal balance (Dr/Cr) for that section of the general ledger.[32] An example is an office coffee
fund: Expense "Coffee" (Dr) may be immediately followed by "Coffee - employee
contributions" (Cr).[33] Such an account is used for clarity rather than being a necessary part of
GAAP (generally accepted accounting principles).[32]
Accounts classification
Each of the following accounts is either an Asset (A), Contra Account (CA), Liability (L),
Shareholders’ Equity (SE), Revenue (Rev), Expense (Exp) or Dividend (Div) account.
Account transactions can be recorded as a debit to one account and a credit to another account
using the modern or traditional approaches in accounting following are their normal balances:
Accounts A/CA/L/SE/Rev/Exp/Div Dr/ Cr
Inventory A Dr
Wages expense Exp Dr
Accounts payable L Cr
Retained earnings SE Cr
Repair revenue Rev Cr
Cost of goods sold Exp Dr

Accounts receivable A Dr
Allowance for doubtful accounts CA (A/R) Cr
Common shares Div Cr
Accumulated depreciation CA (A) Cr
Investment in shares A Dr
Financial statement
Historical financial statements
Financial statements (or financial reports) are formal records of the financial activities and
position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to
understand. They typically include four basic financial statements accompanied by a
management discussion and analysis:[2]
1. A balance sheet or statement of financial position, reports on a company's assets,

liabilities, and owners equity at a given point in time.
2. An income statement—or profit and loss report (P&L report), or statement of
comprehensive income, or statement of revenue & expense—reports on a company's
income, expenses, and profits over a stated period of time. A profit and loss statement
provides information on the operation of the enterprise. These include sales and the
various expenses incurred during the stated period.
3. A statement of changes in equity or equity statement, or statement of retained
earnings, reports on the changes in equity of the company over a stated period of time.
4. A cash flow statement reports on a company's cash flow activities, particularly its
operating, investing and financing activities over a stated period of time.
(Notably, a balance sheet represents a single point in time, where the income statement, the
statement of changes in equity, and the cash flow statement each represent activities over a stated
period of time.)
For large corporations, these statements may be complex and may include an extensive set of
footnotes to the financial statements and management discussion and analysis. The notes
typically describe each item on the balance sheet, income statement and cash flow statement in
further detail. Notes to financial statements are considered an integral part of the financial
statements.
Contents
 1 Purpose for business entities
 2 Consolidated
 3 Government
 4 Personal
 5 Audit and legal implications
 6 Standards and regulations
 7 Inclusion in annual reports
 8 Notes
 9 Management discussion and analysis
 10 Move to electronic statements
 11 See also
 12 References
 13 Further reading
 14 External links
Purpose for business entities

"The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an enterprise that is useful to a wide range of
users in making economic decisions."[3] Financial statements should be understandable, relevant,
reliable and comparable. Reported assets, liabilities, equity, income and expenses are directly
related to an organization's financial position.
Financial statements are intended to be understandable by readers who have "a reasonable
knowledge of business and economic activities and accounting and who are willing to study the
information diligently."[3] Financial statements may be used by users for different purposes:
 Owners and managers require financial statements to make important business decisions
that affect its continued operations. Financial analysis is then performed on these
statements to provide management with a more detailed understanding of the figures.
These statements are also used as part of management's annual report to the stockholders.
 Employees also need these reports in making collective bargaining agreements (CBA)
with the management, in the case of labor unions or for individuals in discussing their
compensation, promotion and rankings.
 Prospective investors make use of financial statements to assess the viability of investing
in a business. Financial analyses are often used by investors and are prepared by
professionals (financial analysts), thus providing them with the basis for making
investment decisions.
 Financial institutions (banks and other lending companies) use them to decide whether to
grant a company with fresh working capital or extend debt securities (such as a long-term
bank loan or debentures) to finance expansion and other significant expenditures.
consolidated financial statement

Consolidated financial statements - are the "Financial statements of a group in which the
assets, liabilities, equity, income, expenses and cash flows of the parent company and its
subsidiaries are presented as those of a single economic entity", according to International
Accounting Standard 27 "Consolidated and separate financial statements", and International
Financial Reporting Standard 10 "Consolidated financial statements".[1][2]
Consolidated Statement of Financial Position

While preparing a consolidated financial statement, there are two basic procedures that need to
be followed: first, you cancel out all the items that are accounted as an asset in one company and
a liability in another, and then add together all uncancelled items.
There are two main type of items that cancel each other out from the consolidated statement of
financial position.
 "Investment in subsidiary companies" which is treated as an asset in the parent company will be
cancelled out by "share capital" account in subsidiary's statement. Only the parent company's
"share capital" account will be included in the consolidated statement.
 If trading between different companies in one group happen, then the payables of one company
will be cancelled by the receivables of another company.
Goodwill arising on consolidation
Goodwill is treated as an intangible asset in the consolidated statement of financial position. It

arises in cases, where the cost of purchase of shares is not equal to their par value. For example,
if a company buys shares of another company worth $40,000 for $60,000, we conclude that there
is a goodwill worth or $20,000.
Proforma for calculating goodwill is as follows [3]:
Goodwill
Fair value of consideration transferred
Plus fair value of non-controlled interest at acquisition
Less ordinary share capital of subsidiary company
Less share premium of subsidiary company
Less retained earnings of subsidiary company at acquisition date
Less fair value adjustments at acquisition date
Non-controlled interest
If the parent company does not buy 100% of shares of the subsidiary company, there is a
proportion of the net assets that is owned by the external company. This proportion that is related
to outside investors is called the non-controlling interest (NCI).
The proforma for calculating the NCI is as follows:
Non-controlling interest
Fair value of NCI at acquisition date
Plus NCI's share of post-acquisition retained earnings or other reserves
NCI at the reporting date

Intra-group trading
In a group of companies, they can have trade relations with each other. For example, company A buys
goods for one price and sells them to another company inside the group for another price. Thus,
company A has earned some revenue from selling, but the group as a whole didn't make any profit out
of that transaction. Until those goods are sold to an outsider company, the group has unrealised profit.
Fund accounting
Fund accounting is an accounting system for recording resources whose use has been limited by
the donor, grant authority, governing agency, or other individuals or organisations or by law.[1][2]
It emphasizes accountability rather than profitability, and is used by Nonprofit organizations and
by governments. In this method, a fund consists of a self-balancing set of accounts and each are
reported as either unrestricted, temporarily restricted or permanently restricted based on the
provider-imposed restrictions.[1]
The label fund accounting has also been applied to investment accounting, portfolio accounting
or securities accounting – all synonyms describing the process of accounting for a portfolio of
investments such as securities, commodities and/or real estate held in an investment fund such as
a mutual fund or hedge fund.[3][4] Investment accounting, however, is a different system,
unrelated to government and nonprofit fund accounting.
Overview
Nonprofit organizations and government agencies have special requirements to show, in
financial statements and reports, how money is spent, rather than how much profit was earned.
Unlike profit oriented businesses, which use a single set of self-balancing accounts (or general
ledger), nonprofits can have more than one general ledger (or fund), depending on their financial
reporting requirements.[5] An accountant for such an entity must be able to produce reports
detailing the expenditures and revenues for each of the organization's individual funds, and
reports that summarize the organization's financial activities across all of its funds.[6][7]
Fund accounting distinguishes between two primary classes of fund.[1][8] Those funds that have
an unrestricted use, that can be spent for any purposes by the organization and those that have a
restricted use. The reason for the restriction can be for a number of different reasons. Examples
include legal requirements, where the moneys can only be lawfully used for a specific purpose,
or a restriction imposed by the donor or provider. These donor/provider restrictions are usually
communicated in writing and may be found in the terms of an agreement, government grant, will
or gift.[8]
When using the fund accounting method an organization is able to therefore separate the
financial resources between those immediately available for ongoing operations and those
intended for a donor specified reason. This also provides an audit trail that all moneys have been
spent for their intended purpose and thereby released from the restriction.[1]
An example may be a local school system in the United States. It receives a grant from the its
local state government to support a new special education initiative, another grant from the
federal government for a school lunch program, and an annuity to award teachers working on
research projects. At periodic intervals, the school system needs to generate a report to the state
about the special education program, a report to a federal agency about the school lunch
program, and a report to another authority about the research program. Each of these programs
has its own unique reporting requirements, so the school system needs a method to separately
identify the related revenues and expenditures. This is done by establishing separate funds, each
with its own chart of accounts.
Nonprofit organizations
Nonprofit organization's finances are broken into two primary categories, unrestricted and
restricted funds. [8] The number of funds in each category can change over time and are
determined by the restrictions and reporting requirements by donors, board, or fund providers.[9]
Unrestricted funds are, as their name suggests, unrestricted and therefore organizations don't
necessarily need more than a single General Fund, however many larger organizations use
several to help them account for the unrestricted resources. Unrestricted funds may include:
 General fund - This is the minimum fund needed for unrestricted resources and relates to
current as well as non-current assets and related liabilities which can be used at the discretion
of the organisation's governing board.
 Designated fund - assets which have been assigned to a specific purpose by the organisation's
governing board but are still unrestricted as the board can cancel the desired use.[10]
 Trading funds - Many large non-profit organisations now have shops and other outlets where
they raise funds from selling goods and services. The profits from these are then used for the
purpose of the organisations.[10]
 Plant (Land, building and equipment) fund - Some organizations hold their non-current assets
and related liabilities in a separate fund from the current assets.[1]
 Current fund – unrestricted - If the organization holds his non-current assets in a plant fund then
this is used to account for current assets that can be used at the discretion of the organization's
governing board.[1][11]
Restricted funds may include:
 Endowment funds - permanent are used to account for the principal amount of gifts or grants
the organization is required, by agreement with the donor, to maintain intact in perpetuity or
until a specific future date/event or has been used for the purpose for which it was given.
 Endowment funds - temporary are similar to permanent endowment funds except that at a
future time or after a specified future event the endowment become available for unrestricted
or purpose-restricted use by the organization[1]
 Annuity and Life-Income Funds are resources provided by donors where the organization has a
beneficial interest but is not the sole beneficiary. These may include charitable gift annuities or
life income funds.[1]
 Agency or Custodian funds are held to account for resources before they are disbursed
according to the donor's instructions. The organisation has little or no discretion over the use of
these resources and always equal liabilities in agency accounts.[1]
 Current funds – restricted are current assets subject to restrictions assigned by donors or
grantors.[1][11]
Accounting basis and financial reporting
Like Profit making organizations, nonprofits and governments will produce Consolidated
Financial Statements. These are generated in line with the reporting requirements in the country
they are based or if they are large enough they may produce them under International Financial
Reporting Standards (IFRS), an example of this is the UK based charity Oxfam.[10] If the
organization is small it may use a cash basis accounting but larger ones generally use accrual
basis accounting for their funds.[12]
Nonprofit organizations in the United States have prepared their financial statements using
Financial Accounting Standards Board (FASB) guidance since 1993.[13] The financial reporting
standards are primarily contained in FAS117 and FIN43.[14] FASB issued a major update in 2016
that changed reporting net assets from three primary categories to two categories, restricted and
unrestricted funds and how these are represented on financial statements.[15]
Nonprofit and governments use the same four standard financial statements as profit-making
organizations:
 Statement of financial activities or statement of support, revenue and expenses. This statement
resembles the income statement of a business, but may use terms like excess or deficit rather
than profit or loss. It shows the net results, by each fund, of the organization's activities during
the fiscal year reported. The excess or deficit is shown as a change in fund balances,[16] simpler
to an increase or decrease in owner's equity.
 Statement of financial position or balance sheet. Similar to the balance sheet of a business, this
statement lists the value of assets held and debts owed by the organization at the end of the
reporting period.[17]
 Statement of changes in equity - just as for profit-making organizations, this shows the change in
the organization equity over the year. Under IFRS the nonprofit organization can choose if it
wants to produce this statement or not; some do,[18] and some don't.[10]
 Statement of cash flows identifies the sources of cash flowing into the organization and the uses
of cash flowing out during the reported fiscal year.[19]
In the United States there may also be a separate Statement of functional expenses which
distributes each expense of the organization into amounts related to the organization's various
functions. These functions are segregated into two broad categories: program services and
supporting services. Program services are the mission-related activities performed by the
organization. Non-program supporting services include the costs of fund-raising events,
management and general administration.[20] This is a required section of the Form 990 that is an
annual informational return required by the Internal Revenue Service for nonprofit
organizations.[21]
United Kingdom governmental system

The United Kingdom government has the following funds:
 Consolidated Fund is the fund where all date-to-day revenues and expenses of the government
are accounted. Each of the devolved government also have a consolidated fund.[22]
 Trading fund is a government organisation which has been established as such by means of a
trading fund order.[23]
 The National Loans Fund is the government's main borrowing and lending account. it is closely
linked to the consolidated fund, which is balanced daily by means of a transfer to, or from, the
national loans fund.
 The Exchange Equalisation Account is the government fund holding the UK's reserves of foreign
currencies, gold, and special drawing rights. It can be used to manage the value of the pound
sterling on international markets.
 National Insurance Funds are accounts which holds the contributions of the National Insurance
Scheme.
 The Contingencies Fund is an account which may be used for urgent expenditure in anticipation
that the money will be approved by Parliament, or for small payments that were not included in
the year's budget estimates.[24]
The United Kingdom government produces the financial statements called the Whole of
Government Accounts. They are produced using the annual basis and generated under the
International Financial Reporting Standards like any other large organisation.[18]
United States governmental system
State and local government funds
State and local governments use three broad categories of funds: governmental funds,
proprietary funds and fiduciary funds.[2][7]
Governmental funds include the following.[25][26]
 General fund. This fund is used to account for general operations and activities not requiring the
use of other funds.
 Special revenue (or special) funds are required to account for the use of revenue earmarked by
law for a particular purpose. An example would be a special revenue fund to record state and
federal fuel tax revenues, since by federal and state law the tax revenue can only be spent on
transportation uses.
 Capital projects funds are used to account for the construction or acquisition of fixed assets,[27]
such as buildings, equipment and roads. Depending on its use, a fixed asset may instead be
financed by a special revenue fund or a proprietary fund. A capital project fund exists only until
completion of the project.[28] Fixed assets acquired and long-term debts incurred by a capital
project are assigned to the government's General Fixed Assets and Long-Term Debts.
 Debt service funds are used to account for money that will be used to pay the interest and
principal of long-term debts. Bonds used by a government to finance major construction
projects, to be paid by tax levies over a period of years, require a debt service fund (sometimes
titled as "interest and sinking fund") to account for their repayment. The debts of permanent
and proprietary funds are serviced within those funds, rather than by a separate debt service
fund.[29]
 Permanent funds should be used to report resources that are legally restricted to the extent that
only earnings, and not principal, may be used for purposes that support the reporting
government’s programs—that is, for the benefit of the government or its citizenry.[30]
Proprietary funds include the following.[25]
 Internal service funds are used for operations serving other funds or departments within a
government on a cost-reimbursement basis. A printing shop, which takes orders for booklets
and forms from other offices and is reimbursed for the cost of each order, would be a suitable
application for an internal service fund.[31]
 Enterprise funds are used for services provided to the public on a user charge basis, similar to
the operation of a commercial enterprise.[32] Water and sewage utilities are common examples
of government enterprises.[33]
Fiduciary funds are used to account for assets held in trust by the government for the benefit of
individuals or other entities.[34] The employee pension fund, created by the State of Maryland to
provide retirement benefits for its employees, is an example of a fiduciary fund.[32] Financial
statements may further distinguish fiduciary funds as either trust or agency funds; a trust fund
generally exists for a longer period of time than an agency fund.[35]
Fixed assets and long-term debts
State and local governments have two other groups of self-balancing accounts which are not
considered funds: general fixed assets and general long-term debts. These assets and liabilities
belong to the government entity as a whole, rather than any specific fund.[36] Although general
fixed assets would be part of government-wide financial statements (reporting the entity as a
whole), they are not reported in governmental fund statements.[37] Fixed assets and long-term
liabilities assigned to a specific enterprise fund are referred to as fund fixed assets and fund long-
term liabilities.[38]
Accounting basis
The accrual basis of accounting used by most businesses requires revenue to be recognized when
it is earned and expenses to be recognized when the related benefit is received. Revenues may
actually be received during a later period, while expenses may be paid during an earlier or later
period. (Cash basis accounting, used by some small businesses, recognizes revenue when
received and expenses when paid.)
Governmental funds, which are not concerned about profitability, usually rely on a modified
accrual basis. This involves recognizing revenue when it becomes both available and
measurable, rather than when it is earned. Expenditures, a term preferred over expenses for
modified accrual accounting, are recognized when the related liability is incurred.[39][40]
Proprietary funds, used for business-like activities, usually operate on an accrual basis.[41]
Governmental accountants sometimes refer to the accrual basis as "full accrual" to distinguish it
from modified accrual basis accounting.[42]
The accounting basis applied to fiduciary funds depends upon the needs of a specific fund. If the
trust involves a business-like operation, accrual basis accounting would be appropriate to show
the fund's profitability. Accrual basis is also appropriate for trust funds using interest and
dividends from invested principle amounts to pay for supported programs, because the
profitability of those investments would be important.[43]
Financial reporting
State and local governments report the results of their annual operations in a comprehensive
annual financial report (CAFR), the equivalent of a business's financial statements. A CAFR
includes a single set of government-wide statements, for the government entity as a whole, and
individual fund statements. The Governmental Accounting Standards Board establishes
standards for CAFR preparation.[7]
Governments do not use the terms profit and loss to describe the net results of their operations.
The difference between revenues and expenditures during a year is either a surplus or a deficit.
Since making a profit is not the purpose of a government, a significant surplus generally means a
choice between tax cuts or spending increases. A significant deficit will result in spending cuts or
borrowing. Ideally, surpluses and deficits should be small.[7][44][45]
Federal government funds
Federal government accounting uses two broad groups of funds: the federal funds group and the
trust funds group.[46]
Federal funds group
 General fund. Technically, there is just one general fund, under the control of the United States
Treasury Department. However, each federal agency maintains its own self-balancing set of
accounts. The general fund is used to account for receipts and payments that do not belong to
another fund.[47]
 Special funds are similar to the special revenue funds used by state and local governments,
earmarked for a specific purpose (other than business-like activities).[48]
 Revolving funds are similar to the Proprietary funds used by state and local governments for
business-like activities. The term, revolving, means that it conducts a continuing cycle of activity.
There are two types of revolving funds in the Federal Funds Group: public enterprise funds and
intragovernmental revolving funds.[49]
o Public enterprise funds are similar to the enterprise funds used by state and local
governments for business-like activities conducted primarily with the public.[48] The
Postal Service Fund is an example of a public enterprise fund.[50]
o Intragovernmental revolving funds are similar to the internal service funds used by state
and local governments for business-like activities conducted within the federal
government.[48]
Trust funds group
 Trust funds are earmarked for specific programs and purposes in accordance with a statute that
designates the fund as a trust. Its statutory designation distinguishes the fund as a trust rather
than a special fund. The Highway Trust Fund is an example of trust funds.[51]
 Trust Revolving Funds are business-like activities, designated by statute as trust funds. They are,
otherwise, identical to public enterprise revolving funds.[51]
 Deposit funds are similar to the agency funds used by state and local governments for assets
belonging to individuals and other entities, held temporarily by the government. State income
taxes withheld from a federal government employee's pay, not yet paid to the state, are an
example of deposit funds.[52]
The United States government uses accrual basis accounting for all of its funds. Its consolidated
annual financial report uses two indicators to measure financial health: unified budget deficit and
net operating (cost)/revenue.[53]
The unified budget deficit, a cash-basis measurement, is the equivalent of a checkbook balance.
This indicator does not consider long-term consequences, but has historically been the focus of
budget reporting by the media. Except for the unified budget deficit, the federal government's
financial statements rely on accrual basis accounting.[53]
Net operating (cost)/revenue, an accrual basis measurement, is calculated in the "Statements of
Operations and Changes in Net Position" by comparing revenues with costs.[54] The federal
government's net operating (cost)/revenue is comparable with the net income/(loss) reported on
an income statement by a business, or the surplus/(deficit) reported by state and local
governments.
Fund accounting fiscal cycle (fictitious example)

The following is a simplified example of the fiscal cycle for the general fund of the City of
Tuscany, a fictitious city government.
Opening entries
The fiscal cycle begins with the approval of a budget[55] by the mayor and city council of the City
of Tuscany. For Fiscal Year 2009, which began on July 1, 2008, the Mayor's Office estimated
general fund revenues of $35 million from property taxes, state grants, parking fines and other
sources. The estimate was recorded in the fund's general ledger with a debit to estimated
revenues and a credit to fund balance.[56]
Ledger account Debit Credit
1 Estimated revenues $35,000,000
Fund balance $35,000,000
An appropriation was approved by the city council, authorizing the city to spend $34 million
from the general fund. The appropriation was recorded in fund's general ledger with a debit to
fund balance and a credit to appropriations.[56]
2 Fund balance $34,000,000
Appropriations $34,000,000
In subsidiary ledgers, the appropriation would be divided into smaller amounts authorized for
various departments and programs,[57] such as:
Fire department $5,000,000
Police department $5,000,000
Schools $10,000,000
Public works $6,000,000
Transportation $4,000,000
Mayor's office $4,000,000
The complexity of an appropriation depends upon the city council's preferences; real-world
appropriations can list hundreds of line item amounts. An appropriation is the legal authority for
spending[58] given by the city council to the various agencies of the city government. In the
example above, the city can spend as much as $34 million, but smaller appropriation limits have
also been established for individual programs and departments.
Recording revenues
During Fiscal Year 2009, the city assessed property owners a total of $37 million for property
taxes. However, the Mayor's Office expects $1 million of this assessment to be difficult or
impossible to collect. Revenues of $36 million were recognized, because this portion of the
assessment was available and measurable[39][40] within the current period.
3 Taxes receivable $37,000,000
Estimated uncollectible taxes $1,000,000
Revenues $36,000,000
Payroll expenditures
The city spent a total of $30 million on its employee payroll, including various taxes, benefits
and employee withholding. A portion of the payroll taxes will be paid in the next fiscal period,
but modified accrual accounting requires the expenditure to be recorded during the period the
liability was incurred.[39][40]
4 Expenditures $30,000,000
Wages payable $20,000,000
Taxes payable $5,000,000
Benefits payable $5,000,000
Other expenditures
The Public Works Department spent $1 million on supplies and services for maintaining city
streets.[59]
5 Expenditures $1,000,000
Vouchers payable $1,000,000
Closing entries
At the end of the fiscal year, the actual revenues of $36 million were compared with the estimate
of $35 million. The $1 million difference was recorded as a credit to the fund balance.[60]
6 Revenues $36,000,000
Estimated revenues $35,000,000
The city spent $31 million of its $34 million appropriation. A credit of $3 million was applied to
the fund balance for the unspent amount.[60]
7 Appropriations $34,000,000
Expenditures $31,000,000
When the current fiscal period ended, its appropriation expired. The balance remaining in the
general fund at that time is considered unexpended. City government agencies are not allowed to
spend the unexpended balance, even if their expenditures during the now-ended fiscal period
were less than their share of the expired appropriation. A new appropriation is necessary to
authorize spending in the next fiscal period. (Liabilities incurred at the end of the fiscal period
for goods and services ordered, but not yet received, are usually considered expended, allowing
payment at a later date under the current appropriation. Some jurisdictions, however, require the
amounts to be included in the following period's budget.)[61]
Instead of re-applying the unspent balance from the general fund to the same programs, the city
council may choose to spend the money on other programs. Alternatively, they may use the
balance to cut taxes or pay off a long-term debt. With a large surplus, reducing the tax burden
will usually be the preferred choice.[7]
Balance sheet
In financial accounting, a balance sheet or statement of financial position or statement of
financial condition is a summary of the financial balances of an individual or organization,
whether it be a sole proprietorship, a business partnership, a corporation, private limited
company or other organization such as Government or not-for-profit entity. Assets, liabilities and
ownership equity are listed as of a specific date, such as the end of its financial year. A balance
sheet is often described as a "snapshot of a company's financial condition".[1] Of the four basic
financial statements, the balance sheet is the only statement which applies to a single point in
time of a business' calendar year.
A standard company balance sheet has two sides: assets, on the left and financing, which itself
has two parts, liabilities and ownership equity, on the right. The main categories of assets are
usually listed first, and typically in order of liquidity.[2] Assets are followed by the liabilities. The
difference between the assets and the liabilities is known as equity or the net assets or the net
worth or capital of the company and according to the accounting equation, net worth must equal
assets minus liabilities.[3]
Another way to look at the balance sheet equation is that total assets equals liabilities plus
owner's equity. Looking at the equation in this way shows how assets were financed: either by
borrowing money (liability) or by using the owner's money (owner's or shareholders' equity).
Balance sheets are usually presented with assets in one section and liabilities and net worth in the
other section with the two sections "balancing".
A business operating entirely in cash can measure its profits by withdrawing the entire bank
balance at the end of the period, plus any cash in hand. However, many businesses are not paid
immediately; they build up inventories of goods and they acquire buildings and equipment. In
other words: businesses have assets and so they cannot, even if they want to, immediately turn
these into cash at the end of each period. Often, these businesses owe money to suppliers and to
tax authorities, and the proprietors do not withdraw all their original capital and profits at the end
of each period. In other words, businesses also have liabilities.
Types
A balance sheet summarizes an organization or individual's assets, equity and liabilities at a
specific point in time. Two forms of balance sheet exist. They are the report form and account
form. Individuals and small businesses tend to have simple balance sheets.[4] Larger businesses
tend to have more complex balance sheets, and these are presented in the organization's annual
report.[5] Large businesses also may prepare balance sheets for segments of their businesses.[6] A
balance sheet is often presented alongside one for a different point in time (typically the previous
year) for comparison.[7][8]
Personal
A personal balance sheet lists current assets such as cash in checking accounts and savings
accounts, long-term assets such as common stock and real estate, current liabilities such as loan
debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan
debt. Securities and real estate values are listed at market value rather than at historical cost or
cost basis. Personal net worth is the difference between an individual's total assets and total
liabilities.[9]
US small business
Sample Small Business Balance Sheet[10]
Assets (current) Liabilities and Owners' Equity
Cash $6,600 Liabilities
Accounts Receivable $6,200 Notes Payable $5,000
Assets (non-current) Accounts Payable $25,000
Tools and equipment $25,000 Total liabilities $30,000

Owners' equity
Capital Stock $7,000
Retained Earnings $800
Total owners' equity $7,800
Total $37,800 Total $37,800
A small business balance sheet lists current assets such as cash, accounts receivable, and
inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents,
and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent
liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's
equity is the difference between total assets and total liabilities.[11]
Public business entities structure

Guidelines for balance sheets of public business entities are given by the International
Accounting Standards Board and numerous country-specific organizations/companies. The
standard used by companies in the USA adhere to U.S. Generally Accepted Accounting
Principles (GAAP). The Federal Accounting Standards Advisory Board (FASAB) is a United
States federal advisory committee whose mission is to develop generally accepted accounting
principles (GAAP) for federal financial reporting entities.
Balance sheet account names and usage depend on the organization's country and the type of
organization. Government organizations do not generally follow standards established for
individuals or businesses.[12][13][14]
If applicable to the business, summary values for the following items should be included in the
balance sheet:[15] Assets are all the things the business owns. This will include property, tools,
vehicles, furniture, machinery, and so on.
Assets
Current assets
1. Accounts receivable
2. Cash and cash equivalents
3. inventories
4. Cash at bank, Petty Cash, Cash On Hand
5. Prepaid expenses for future services that will be used within a year
6. Revenue Earned In Arrears (Accrued Revenue) for services done but not yet received for the
year
7. Loan To (Less than one financial period)
Non-current assets (Fixed assets)
1. Property, plant and equipment

2. Investment property, such as real estate held for investment purposes
3. Intangible assets such as (patents, copyrights and goodwill)
4. Financial assets (excluding investments accounted for using the equity method, accounts
receivables, and cash and cash equivalents), such as notes receivables
5. Investments accounted for using the equity method
6. Biological assets, which are living plants or animals. Bearer biological assets are plants or
animals which bear agricultural produce for harvest, such as apple trees grown to produce
apples and sheep raised to produce wool.[16]
7. Loan To (More than one financial period)
Liabilities
1. Accounts payable
2. Provisions for warranties or court decisions (contingent liabilities that are both probable and
measurable)
3. Financial liabilities (excluding provisions and accounts payables), such as promissory notes and
corporate bonds
4. Liabilities and assets for current tax
5. Deferred tax liabilities and deferred tax assets
6. Unearned revenue for services paid for by customers but not yet provided
7. Interests on loan stock
Creditors equity
Equity / capital
The net assets shown by the balance sheet equals the third part of the balance sheet, which is
known as the shareholders' equity. It comprises:
1. Issued capital and reserves attributable to equity holders of the parent company (controlling
interest)
2. Non-controlling interest in equity
Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to
shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the
more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and
liabilities (including shareholders' equity) is not a coincidence. Records of the values of each
account in the balance sheet are maintained using a system of accounting known as double-entry
bookkeeping. In this sense, shareholders' equity by construction must equal assets minus
liabilities, and thus the shareholders' equity is considered to be a residual.
Regarding the items in equity section, the following disclosures are required:
1. Numbers of shares authorized, issued and fully paid, and issued but not fully paid
2. Par value of shares
3. Reconciliation of shares outstanding at the beginning and the end of the period
4. Description of rights, preferences, and restrictions of shares
5. Treasury shares, including shares held by subsidiaries and associates
6. Shares reserved for issuance under options and contracts
7. A description of the nature and purpose of each reserve within owners' equity
Substantiation
Balance sheet substantiation is the accounting process conducted by businesses on a regular basis
to confirm that the balances held in the primary accounting system of record (e.g. SAP, Oracle,
other ERP system's General Ledger) are reconciled (in balance with) with the balance and
transaction records held in the same or supporting sub-systems.
Balance sheet substantiation includes multiple processes including reconciliation (at a

transactional or at a balance level) of the account, a process of review of the reconciliation and
any pertinent supporting documentation and a formal certification (sign-off) of the account in a
predetermined form driven by corporate policy.
Balance sheet substantiation is an important process that is typically carried out on a monthly,
quarterly and year-end basis. The results help to drive the regulatory balance sheet reporting
obligations of the organization.
Historically, balance sheet substantiation has been a wholly manual process, driven by
spreadsheets, email and manual monitoring and reporting. In recent years software solutions
have been developed to bring a level of process automation, standardization and enhanced
control to the balance sheet substantiation or account certification process. These solutions are
suitable for organizations with a high volume of accounts and/or personnel involved in the
Balance Sheet Substantiation process and can be used to drive efficiencies, improve transparency
and help to reduce risk.
Balance sheet substantiation is a key control process in the SOX 404 top-down risk assessment.
Sample
The following balance sheet is a very brief example prepared in accordance with IFRS. It does
not show all possible kinds of assets, liabilities and equity, but it shows the most usual ones.
Because it shows goodwill, it could be a consolidated balance sheet. Monetary values are not
shown, summary (subtotal) rows are missing as well.
Under IFRS items are always shown based on liquidity from the least liquid assets at the top,
usually land and buildings to the most liquid, i.e. cash. Then liabilities and equity continue from
the most immediate liability to be paid (usual account payable) to the least i.e. long term debt
such a mortgages and owner's equity at the very bottom.[17]
Consolidated Statement of Finance Position of XYZ, Ltd.
As of 31 December 2025
ASSETS
Non-Current Assets (Fixed Assets)
Property, Plant and Equipment (PPE)
Less : Accumulated Depreciation
Goodwill
Intangible Assets (Patent, Copyright, Trademark, etc.)
Less : Accumulated Amortization
Investments in Financial assets due after one year
Investments in Associates and Joint Ventures
Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable and
Receivables due after one year
Current Assets
Inventories
Prepaid Expenses
Investments in Financial assets due within one year
Non-Current and Current Assets Held for sale
Accounts Receivable (Debtors) due within one year
Less : Allowances for Doubtful debts
Cash and Cash Equivalents
TOTAL ASSETS (this will match/balance the total for Liabilities and Equity
below)
LIABILITIES and EQUITY
Current Liabilities (Creditors: amounts falling due within one year)
Accounts Payable
Current Income Tax Payable
Current portion of Loans Payable
Short-term Provisions
Other Current Liabilities, e.g. Deferred income, Security deposits
Non-Current Liabilities (Creditors: amounts falling due after more than one
year)
Loans Payable
Issued Debt Securities, e.g. Notes/Bonds Payable
Deferred Tax Liabilities
Provisions, e.g. Pension Obligations
Other Non-Current Liabilities, e.g. Lease Obligations
EQUITY
Paid-in Capital
Share Capital (Ordinary Shares, Preference Shares)
Share Premium
Less: Treasury Shares
Retained Earnings
Revaluation Reserve
Other Accumulated Reserves
Accumulated Other Comprehensive Income
Non-Controlling Interest
TOTAL LIABILITIES and EQUITY (this will match/balance the total for Assets
above)
Income statement
An income statement or profit and loss account[1] (also referred to as a profit and loss
statement (P&L), statement of profit or loss, revenue statement, statement of financial
performance, earnings statement, statement of earnings, operating statement, or statement of
operations)[2] is one of the financial statements of a company and shows the company’s revenues
and expenses during a particular period.[1]
It indicates how the revenues (also known as the “top line”) are transformed into the net income
or net profit (the result after all revenues and expenses have been accounted for). The purpose of
the income statement is to show managers and investors whether the company made money
(profit) or lost money (loss) during the period being reported.
An income statement represents a period of time (as does the cash flow statement). This contrasts
with the balance sheet, which represents a single moment in time.
Charitable organizations that are required to publish financial statements do not produce an
income statement. Instead, they produce a similar statement that reflects funding sources
compared against program expenses, administrative costs, and other operating commitments.
This statement is commonly referred to as the statement of activities.[3] Revenues and expenses
are further categorized in the statement of activities by the donor restrictions on the funds
received and expended.
The income statement can be prepared in one of two methods.[4] The Single Step income
statement totals revenues and subtracts expenses to find the bottom line. The Multi-Step income
statement takes several steps to find the bottom line: starting with the gross profit, then
calculating operating expenses. Then when deducted from the gross profit, yields income from
operations.
Adding to income from operations is the difference of other revenues and other expenses. When
combined with income from operations, this yields income before taxes. The final step is to
deduct taxes, which finally produces the net income for the period measured.
Usefulness and limitations of income statement

Income statements may help investors and creditors determine the past financial performance of
the enterprise, predict the future performance, and assess the capability of generating future cash
flows using the report of income and expenses.
However, information of an income statement has several limitations:
 Items that might be relevant but cannot be reliably measured are not reported (e.g., brand
recognition and loyalty).
 Some numbers depend on accounting methods used (e.g., using FIFO or LIFO accounting to
measure inventory level).
 Some numbers depend on judgments and estimates (e.g., depreciation expense depends on
estimated useful life and salvage value).
- INCOME STATEMENT GREENHARBOR LLC -

For the year ended DECEMBER 31 2010
€ €
Debit Credit
Revenues
GROSS REVENUES (including INTEREST income) 296,397
--------
Expenses:
ADVERTISING 6,300
BANK & CREDIT CARD FEES 144
BOOKKEEPING 2,350
SUBCONTRACTORS 88,000
ENTERTAINMENT 5,550
INSURANCE 750
LEGAL & PROFESSIONAL SERVICES 1,575
LICENSES 632
PRINTING, POSTAGE & STATIONERY 320
RENT 13,000
MATERIALS 74,400
TELEPHONE 1,000
UTILITIES 1,491
--------
TOTAL EXPENSES (195,512)
--------
NET INCOME 100,885
Guidelines for statements of comprehensive income and income statements of business entities
are formulated by the International Accounting Standards Board and numerous country-specific
organizations, for example the FASB in the U.S..
Names and usage of different accounts in the income statement depend on the type of
organization, industry practices and the requirements of different jurisdictions.
If applicable to the business, summary values for the following items should be included in the
income statement:[5]
Operating section
 Revenue - Cash inflows or other enhancements of assets (including accounts receivable) of an

entity during a period from delivering or producing goods, rendering services, or other activities
that constitute the entity's ongoing major operations. It is usually presented as sales minus sales
discounts, returns, and allowances. Every time a business sells a product or performs a service, it
obtains revenue. This often is referred to as gross revenue or sales revenue.[6]
 Expenses - Cash outflows or other using-up of assets or incurrence of liabilities (including
accounts payable) during a period from delivering or producing goods, rendering services, or
carrying out other activities that constitute the entity's ongoing major operations.
o Cost of Goods Sold (COGS) / Cost of Sales - represents the direct costs attributable to
goods produced and sold by a business (manufacturing or merchandizing). It includes
material costs, direct labour, and overhead costs (as in absorption costing), and excludes
operating costs (period costs) such as selling, administrative, advertising or R&D, etc.
o Selling, General and Administrative expenses (SG&A or SGA) - consist of the combined
payroll costs. SGA is usually understood as a major portion of non-production related
costs, in contrast to production costs such as direct labour.
 Selling expenses - represent expenses needed to sell products (e.g., salaries of
sales people, commissions and travel expenses, advertising, freight, shipping,
depreciation of sales store buildings and equipment, etc.).
 General and Administrative (G&A) expenses - represent expenses to manage
the business (salaries of officers / executives, legal and professional fees,
utilities, insurance, depreciation of office building and equipment, office rents,
office supplies, etc.).
o Depreciation / Amortization - the charge with respect to fixed assets / intangible assets
that have been capitalised on the balance sheet for a specific (accounting) period. It is a
systematic and rational allocation of cost rather than the recognition of market value
decrement.
o Research & Development (R&D) expenses - represent expenses included in research
and development.
Expenses recognised in the income statement should be analysed either by nature (raw
materials, transport costs, staffing costs, depreciation, employee benefit etc.) or by function (cost
of sales, selling, administrative, etc.). (IAS 1.99) If an entity categorises by function, then
additional information on the nature of expenses, at least, – depreciation, amortisation and
employee benefits expense – must be disclosed. (IAS 1.104) The major exclusive of costs of
goods sold, are classified as operating expenses. These represent the resources expended, except
for inventory purchases, in generating the revenue for the period. Expenses often are divided into
two broad sub classicifications selling expenses and administrative expenses.[7]
Non-operating section
 Other revenues or gains - revenues and gains from other than primary business activities (e.g.,
rent, income from patents, goodwill). It also includes unusual gains that are either unusual or
infrequent, but not both (e.g., gain from sale of securities or gain from disposal of fixed assets)
 Other expenses or losses - expenses or losses not related to primary business operations, (e.g.,
foreign exchange loss).
 Finance costs - costs of borrowing from various creditors (e.g., interest expenses, bank charges).
 Income tax expense - sum of the amount of tax payable to tax authorities in the current
reporting period (current tax liabilities/ tax payable) and the amount of deferred tax liabilities
(or assets).
Irregular items
They are reported separately because this way users can better predict future cash flows -
irregular items most likely will not recur. These are reported net of taxes.
 Discontinued operations is the most common type of irregular items. Shifting business
location(s), stopping production temporarily, or changes due to technological improvement do
not qualify as discontinued operations. Discontinued operations must be shown separately.
Cumulative effect of changes in accounting policies (principles) is the difference between the
book value of the affected assets (or liabilities) under the old policy (principle) and what the
book value would have been if the new principle had been applied in the prior periods. For
example, valuation of inventories using LIFO instead of weighted average method. The changes
should be applied retrospectively and shown as adjustments to the beginning balance of affected
components in Equity. All comparative financial statements should be restated. (IAS 8)
However, changes in estimates (e.g., estimated useful life of a fixed asset) only requires
prospective changes. (IAS 8)
No items may be presented in the income statement as extraordinary items under IFRS
regulations, but are permissible under US GAAP. (IAS 1.87) Extraordinary items are both
unusual (abnormal) and infrequent, for example, unexpected natural disaster, expropriation,
prohibitions under new regulations. [Note: natural disaster might not qualify depending on
location (e.g., frost damage would not qualify in Canada but would in the tropics).]
Additional items may be needed to fairly present the entity's results of operations. (IAS 1.85)
Disclosures
Certain items must be disclosed separately in the notes (or the statement of comprehensive
income), if material, including:[5] (IAS 1.98)
 Write-downs of inventories to net realisable value or of property, plant and equipment to

recoverable amount, as well as reversals of such write-downs
 Restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring
 Disposals of items of property, plant and equipment
 Disposals of investments
 Discontinued operations
 Litigation settlements
 Other reversals of provisions
Earnings per share
Because of its importance, earnings per share (EPS) are required to be disclosed on the face of
the income statement. A company which reports any of the irregular items must also report EPS
for these items either in the statement or in the notes.
There are two forms of EPS reported:
 Basic: in this case “weighted average of shares outstanding” includes only actual stocks
outstanding.
 Diluted: in this case “weighted average of shares outstanding” is calculated as if all stock
options, warrants, convertible bonds, and other securities that could be transformed into shares
are transformed. This increases the number of shares and so EPS decreases. Diluted EPS is
considered to be a more reliable way to measure EPS.
Sample income statement

The following income statement is a very brief example prepared in accordance with IFRS. It
does not show all possible kinds of accounts, but it shows the most usual ones. Please note the
difference between IFRS and US GAAP when interpreting the following sample income
statements.
Fitness Equipment Limited
INCOME STATEMENTS
(in millions)
Year Ended March 31, 2009 2008

2007
----------------------------------------------------------------------------
------
Revenue $14,580.2 $11,900.4
$8,290.3
Cost of sales (6,740.2) (5,650.1)
(4,524.2)
------------- ------------ ------
------
Gross profit 7,840.0 6,250.3
3,766.1
------------- ------------ ------
------
SGA expenses (3,624.6) (3,296.3)

(3,034.0)
------------- ------------ ------
------
Operating profit $ 4,215.4 $ 2,954.0 $
732.1
------------- ------------ ------
------
Gains from disposal of fixed assets 46.3 -

-
Interest expense (119.7) (124.1)
(142.8)
------------- ------------ ------
------
Profit before tax 4,142.0 2,829.9
589.3
------------- ------------ ------
------
Income tax expense (1,656.8) (1,132.0)

(235.7)
------------- ------------ ------
------
Profit (or loss) for the year $ 2,485.2 $ 1,697.9 $
353.6
DEXTERITY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)
Year Ended December 31, 2009

2008 2007
----------------------------------------------------------------------------
------------------
Revenue $36,525.9
$29,827.6 $21,186.8
Cost of sales (18,545.8)
(15,858.8) (11,745.5)
----------- -------
---- ------------
Gross profit 17,980.1
13,968.8 9,441.3
----------- -------
---- ------------
Operating expenses:
Selling, general and administrative expenses (4,142.1)
(3,732.3) (3,498.6)
Depreciation (602.4)
(584.5) (562.3)
Amortization (209.9)
(141.9) (111.8)
Impairment loss (17,997.1)
— —
----------- -------
---- ------------
Total operating expenses (22,951.5)
(4,458.7) (4,172.7)
----------- -------
---- ------------
Operating profit (or loss) $ (4,971.4) $
9,510.1 $ 5,268.6
----------- -------
---- ------------
Interest income 25.3

11.7 12.0
Interest expense (718.9)
(742.9) (799.1)
----------- -------
---- ------------
Profit (or loss) from continuing operations
before tax, share of profit (or loss) from
associates and non-controlling interest $ (5,665.0) $
8,778.9 $ 4,481.5
----------- -------
---- ------------
Income tax expense (1,678.6)

(3,510.5) (1,789.9)
Profit (or loss) from associates, net of tax (20.8)
0.1 (37.3)
Profit (or loss) from non-controlling interest,
net of tax (5.1)
(4.7) (3.3)
----------- -------
---- ------------
Profit (or loss) from continuing operations $ (7,348.7) $
5,263.8 $ 2,651.0
----------- -------
---- ------------
Profit (or loss) from discontinued operations,

net of tax (1,090.3)
(802.4) 164.6
----------- -------
---- ------------
Profit (or loss) for the year $ (8,439) $
4,461.4 $ 2,486.4
Bottom line
“Bottom line” is the net income that is calculated after subtracting the expenses from revenue.
Since this forms the last line of the income statement, it is informally called “bottom line.” It is
important to investors as it represents the profit for the year attributable to the shareholders.
After revision to IAS 1 in 2003, the Standard is now using profit or loss for the year rather than
net profit or loss or net income as the descriptive term for the bottom line of the income
statement.
Requirements of IFRS
On 6 September 2007, the International Accounting Standards Board issued a revised IAS 1:
Presentation of Financial Statements, which is effective for annual periods beginning on or after
1 January 2009.
A business entity adopting IFRS must include:
 a statement of comprehensive income or

 two separate statements comprising:
1. an income statement displaying components of profit or loss and

2. a statement of comprehensive income that begins with profit or loss (bottom line of the
income statement) and displays the items of other comprehensive income for the
reporting period. (IAS1.81)
All non-owner changes in equity (i.e., comprehensive income ) shall be presented in either in the
statement of comprehensive income (or in a separate income statement and a statement of
comprehensive income). Components of comprehensive income may not be presented in the
statement of changes in equity.
Comprehensive income for a period includes profit or loss (net income) for that period and other
comprehensive income recognised in that period.
All items of income and expense recognised in a period must be included in profit or loss unless
a Standard or an Interpretation requires otherwise. (IAS 1.88) Some IFRSs require or permit that
some components to be excluded from profit or loss and instead to be included in other
comprehensive income. (IAS 1.89)
Items and disclosures
The statement of comprehensive income should include:[5] (IAS 1.82)
1. Revenue
2. Finance costs (including interest expenses)
3. Share of the profit or loss of associates and joint ventures accounted for using the equity
method
4. Tax expense
5. A single amount comprising the total of (1) the post-tax profit or loss of discontinued operations
and (2) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s)
constituting the discontinued operation
6. Profit or loss
7. Each component of other comprehensive income classified by nature
8. Share of the other comprehensive income of associates and joint ventures accounted for using
the equity method
9. Total comprehensive income
The following items must also be disclosed in the statement of comprehensive income as
allocations for the period: (IAS 1.83)
 Profit or loss for the period attributable to non-controlling interests and owners of the parent
 Total comprehensive income attributable to non-controlling interests and owners of the parent
No items may be presented in the statement of comprehensive income (or in the income
statement, if separately presented) or in the notes as extraordinary items.
Net income
In business and accounting, net income (also total comprehensive income, net earnings, net
profit, bottom line, sales profit, or credit sales) is a measure of the profitability of a venture. It
is an entity's income minus cost of goods sold, expenses (e.g., SG&A), depreciation &
amortization, interest, and taxes for an accounting period.[1] It is computed as the residual of all
revenues and gains over all expenses and losses for the period,[2] and has also been defined as the
net increase in shareholders' equity that results from a company's operations.[3] It is different
from the gross income, which only deducts the cost of goods sold.
For households and individuals, net income refers to the (gross) income minus taxes and other
deductions (e.g., mandatory pension contributions). It is usually the basis to calculate how much
income tax is owed.
Definition
Net income can be distributed among holders of common stock as a dividend or held by the firm
as an addition to retained earnings. As profit and earnings are used synonymously for income
(also depending on UK and US usage), net earnings and net profit are commonly found as
synonyms for net income. Often, the term income is substituted for net income, yet this is not
preferred due to the possible ambiguity. Net income is informally called the bottom line because
it is typically found on the last line of a company's income statement (a related term is top line,
meaning revenue, which forms the first line of the account statement).
In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor.
In practice this can get very complex in large organizations. The bookkeeper or accountant must
itemise and allocate revenues and expenses properly to the specific working scope and context in
which the term is applied.
Net income is usually calculated per annum, for each fiscal year. The items deducted will
typically include tax expense, financing expense (interest expense), and minority interest.
Likewise, preferred stock dividends will be subtracted too, though they are not an expense. For a
merchandising company, subtracted costs may be the cost of goods sold, sales discounts, and
sales returns and allowances. For a product company, advertising, manufacturing, & design and
development costs are included. Net income can also be calculated by adding a company's
operating income to non-operating income and then subtracting off taxes.[4]
The net profit margin percentage is a related ratio. This figure is calculated by dividing net profit
by revenue or turnover, and it represents profitability, as a percentage.
An equation for net income

Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract
all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.
Net profit = sales revenue − total costs
Net profit is a measure of the fundamental profitability of the venture. "It is the revenues of the
activity less the costs of the activity. The main complication is . . . when needs to be allocated"
across ventures. "Almost by definition, overheads are costs that cannot be directly tied to any
specific" project, product, or division. "The classic example would be the cost of headquarters
staff." "Although it is theoretically possible to calculate profits for any sub-(venture), such as a
product or region, often the calculations are rendered suspect by the need to allocate overhead
costs." Because overhead costs generally don’t come in neat packages, their allocation across
ventures is not an exact science.[5]
Example
Here is how you reach net profit on a P&L (Profit & Loss) account:
1. Sales revenue = price (of product) × quantity sold
2. Gross profit = sales revenue − cost of sales and other direct costs
3. Operating profit = gross profit − overheads and other indirect costs
4. EBIT (earnings before interest and taxes) = operating profit + non-operating income
5. Pretax profit (EBT, earnings before taxes) = operating profit − one off items and redundancy
payments, staff restructuring − interest payable
6. Net profit = Pre-tax profit − tax
7. Retained earnings = Net profit − dividends
Another equation to calculate net income:
Net sales (revenue) - Cost of goods sold = Gross profit - SG&A expenses (combined costs of
operating the company) - Research and development (R&D) = Earnings before interest, taxes,
depreciation and amortization (EBITDA) - Depreciation and amortization = Earnings before
interest and taxes (EBIT) - Interest expense (cost of borrowing money) = Earnings before taxes
(EBT) - Tax expense = Net income (EAT)
Another equation to calculate net income:
Net sales = gross sales – (customer discounts + returns + allowances)
Gross profit = net sales – cost of goods sold
Gross profit percentage = [(net sales – cost of goods sold)/net sales] × 100%.
Operating profit = gross profit – total operating expenses
Net income = operating profit – taxes – interest
Other terms
Net sales = gross sales – (customer discounts, returns, and allowances)
Gross profit = net sales – cost of goods sold
Operating profit = gross profit – total operating expenses
Net profit = operating profit – taxes – interest
Net profit = net sales – cost of goods sold – operating expense – taxes – interest

Single-Entry Bookkeeping System: Advantages

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Single-Entry Bookkeeping System: Advantages

Загружено:

Авторское право:

Доступные форматы

Single-entry bookkeeping system

A single-entry bookkeeping system or single-entry accounting system is a method of

Additionally, the IRS states:

Double-entry bookkeeping system

The accounting equation

In pre-modern Europe, double-entry bookkeeping had theological and cosmological

Debits and credits

assets = liabilities + equity

Debits and credits are numbers recorded as follows:

Asset Increase Decrease

Liability Decrease Increase

Income (revenue) Decrease Increase

Expense Increase Decrease

Capital Decrease Increase

The account types are related as follows:

Asset Increase Decrease

Liability Decrease Increase

Income/Revenue Decrease Increase

Expense/Cost/Dividend Increase Decrease

Equity/Capital Decrease Increase

Debits and credits occur simultaneously in every financial transaction in double-entry

Debit cards and credit cards

The five accounting elements

Debits (Dr) Credits (Cr)

Debits (Dr) Credits (Cr)

Debits (Dr) Credits (Cr)

Debits (Dr) Credits (Cr)

Debits (Dr) Credits (Cr)

Attributes of accounting elements per real, personal, and nominal accounts

Real (assets) Increase Decrease

Personal (liability) Decrease Increase

Personal (owner's equity) Decrease Increase

Nominal (revenue) Decrease Increase

Nominal (expenses) Increase Decrease

Nominal (gain) Decrease Increase

Nominal (loss) Increase Decrease

The general accounting equation is as follows:

Assets = Equity + Liabilities,[20]

The extended accounting equation is as follows:

Assets + Expenses = Equity/Capital + Liabilities + Income,

This can also be rewritten in the equivalent form:

Assets = Liabilities + Equity/Capital + (Income − Expenses),

In accounting it is acceptable to draw-up a ledger account in the following manner for

Debits (Dr) Credits (Cr)

Two types of basic asset classification:[24]

The basic classifications of liability accounts are:

Payable ABC Computers (Liability)

The above example can be written in journal form:

ABC Computers (Payable) 500

In the accounting equation form:

500 = 0 + 500 (the accounting equation is therefore balanced).

Account Debit (Dr) Credit (Cr)

1. Rent (Ex) 100

Bank (A) 100

3. Equipment (A) 5200

Bank (A) 5200

4. Bank (A) 11000

Loan (L) 11000

5. Salary (Ex) 5000

Bank (A) 5000

6. Total (Dr) $21350

Total (Cr) $21350

Debits (Dr) Credits (Cr)