BDC 101
SCHOOL OF ACCOUNTSFACULTY OF BUSINESS AND MANAGEMENT
PREPARED BY:NORAL HIDAYAH ALWI
CHAPTER 4
FINANCIAL ACCOUNTING I
CLASSIFIED FINANCIAL STATEMENTS
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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Learning Objectives :
(i) Identify the components in Financial Statement
a. Income Statementb. Balance Sheet
(ii) Classify the accounting entries in an Income Statement
(iii) Explain Drawings
(iv) Integrate Expenses, Revenue and Drawings in the Accounting equation
(v) Explain the format of the Financial Statements
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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The Accounting System: The Flow Of Information
1. People make decisions
2. Business transactions occur
3. Businesses prepare reports to show the results of their operations
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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1.0 Introduction of Financial Statement
Two (2) principal questions that the owner of a biz asks periodically are:
1. What is my net income?2. What is my equity?
1. The INCOME STATEMENT2. The BALANCE SHEET
This information is provided by:
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.0 FINANCIAL STATEMENT
FS is a statement that produced at the end of accounting periods, such as Trading and Profit & Loss Account and the Balance Sheet
Objectives:Provide info about the business that is useful
to a wide range of users in making economic decisions
FS act as a summary of all transactions happens in business
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.1 FINANCIAL STATEMENT
Financial Statement
Income Statement
Trading Account
Gross Profit/Loss
Profit & Loss Account
Net Profit/Loss
Balance Sheet
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.2 INCOME STATEMENT
Is a part of financial statement used to show the financial performance of a business;
The income statement reports the company’s revenues, expenses, and NET INCOME or NET LOSS for the period;
Is prepared after all adjusting entries are made in general journal, all journal entries have been posted to ledgers and adjusted in Trial Balance.
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.2 INCOME STATEMENT
Income Statement
Trading Account
Gross Profit/Loss
Profit & Loss Account
Net Profit/Loss
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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ii. Profit & Loss Account› 2nd part of Income
Statement› Gross Profit/Loss
+ Other Income – expenses = Net Profit/Loss
› It includes any expenses and income that indirectly occur while production
› Net Profit/Loss will be post to Balance Sheet
2.2.1 INCOME STATEMENT
i. Trading Account› 1st part of Income
Statement› Net Sales – COGS =
Gross Profit/Loss› It includes any
expenses and purchase that directly occur
› Gross Profit/Loss will be send to Profit & Loss Account
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.2.2 INCOME STATEMENT
COGS (Cost of Good Sold)
COGS appears in the Income Statement as a deduction from Net Sales to determine the Gross Profit.
It is the difference between what was available for sale and what is left at the end of the year.
Refer to example A
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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Example A
RM RM RM
Sales 45,000
less: Return Inward 5,000
Net Sales 40,000
Cost of Good Sold
Inventory, Jan 1 10,000
Purchases 25,000
less:Purchase Returns 600
Net Purchases 24,400
add:Carriage Inward 1,000 25,400
35,400
less:Inventory, Dec 31 12,000
Total COGS 23,400
GROSS PROFIT 16,600
In the Income
Statement ,
the Cost of
Goods Sold
section might
appear as:
Income Statement for the year ended… (partial)
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.2.3 INCOME STATEMENT
REVENUES are: Increases in owners equity from delivering goods or services to
customers or clients EXPENSES are:
Decreases in owners equity that result from operationsExpenses include
Cost of goods sold (cost of sales) -The cost of the goods that a company sold to its customers
Operating expenses - The costs of operating the business
Advertising - The cost to promote the company’s productsDepreciation - The expense of using company-owned
buildings, equipment, and furnitureOther operating expenses - The costs of salaries, utilities,
rent, and suppliesInterest expense - The cost of borrowed money
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.3 BALANCE SHEET
The BALANCE SHEET (statement of financial position) reports the company’s assets, liabilities, and owners’ equity
All assets listed on left side, while liabilities and owner’s equity on right side
Importance of Balance Sheet:To show the financial status on a particular date To show the financial liquidity of a business in
terms of the ability to pay debt in short term.CA > CL, business able to pay its debt
CA < CL, business not able to pay its debt
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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CURRENT ASSETS areThose assets which the company expects to
convert to cash, sell, or consume during the next 12 months or within the business's normal operating cycle if longer than a year
Current assets includeCashAccounts receivableMerchandise inventoryPrepaid expenses
2.3.1 COMPONENTS OF BALANCE SHEET - ASSETS
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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LONG-TERM ASSETS (FIXED ASSETS) areThose assets which the company expects to
hold longer than the next 12 months or the business’s normal operating cycle if longer than one year
Long-term assets includePropertyEquipment
2.3.1 COMPONENTS OF BALANCE SHEET - ASSETS
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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INTANGIBLE ASSETS areThose with no physical form
TrademarksPatents
Other assets areThose with small values which do not fall within
any other standard asset category
2.3.1 COMPONENTS OF BALANCE SHEET - ASSETS
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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CURRENT LIABILITIES areDebts payable within one year or within
the business’s normal operating cycle if longer than a year.
Current liabilities includeNotes payable, short termAccounts payableAccrued expenses payableIncome taxes payable
2.3.2 COMPONENTS OF BALANCE SHEET - LIABILITIES
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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1-18
LONG-TERM LIABILITIES areDebts not payable within one year or within the
business’s normal operating cycle if longer than a year
Long-term liabilities includeNotes payable, long termBonds payable
2.3.2 COMPONENTS OF BALANCE SHEET - LIABILITIES
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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OWNERS’ EQUITYRepresents the shareholders’ ownership of the
assets of the business
Owners’ equity of a corporation consists ofCommon stockRetained earnings
2.3.3 COMPONENTS OF BALANCE SHEET – OWNERS’ EQUITY
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.4 DRAWINGS
Drawings are any cash or goods of stock taken out from business for owner’s personal use that cannot be concluded as
business expenses.
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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2.5 Expenses, revenue and drawings in accounting equation
Accounting equation is the basic for this whole accounting.
To summaries this diagram, profit belongs to the owners. Revenues increase profits, so they increase capital, and that makes them credits. Expenses decrease profits, so they reduce capital, and that makes them debits. The treatment of the expenses is the same as assets.
ASSET = CAPITAL + LIABILITY + REVENUE – EXPENSES -DRAWINGS
DEBIT CREDIT
Assets Capital
Expenses Liability
Drawings Revenue
Losses Profit
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
TOPICTrial Balance as at 31 December 20X4
Debit Credit
Sales (IS) and Purchases(IS)Stock 31 December 20X3 (IS)Carriage Outwards (IS)Carriage Inwards(IS)Returns (IS)Salaries (IS)Motor Expenses (IS)Rent (IS)Sundry Expenses (IS)Motor Vehicles (BS)Fixtures and Fittings (BS)Debtors and Creditors (BS)Bank (BS)Cash (BS)Drawings (BS)Capital (BS)
Stock at 31 Dec 20X4 was RM11290
RM108680
94101115840
490041800
9126800318
14400912
232004100240
29440
247067
RM210420
3720
14100
18827247067
3.0 CLASSROOM ACTIVITY 1
Prepare a Financial Statement
from the Trial Balance provided:
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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3.1 CLASSROOM ACTIVITY 2
Trial Balance as at 31 March 20X9
Debit Credit
Sales and PurchasesStock 31 December 20X8Carriage OutwardsCarriage InwardsReturnsSalariesFixtures RepairStationeryCommissionInsuranceSundry ExpensesBuildingsDebtors and CreditorsFixturesBankDrawings Capital
Stock at 31 March 20X9 was RM58440
RM1413005280013505840276
634003800714
19301830208
125000459001106
3142037320
514194
RM276400
2408
24870
210516514194
Prepare a Financial Statement
from the Trial Balance provided:
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CHAPTER 4: CLASSIFIED FINANCIAL STATEMENTS
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3.1 CLASSROOM ACTIVITY 3
Accounts PayableRM11,400 Admission Income
34,200 Capital, Jan 1,2009
16,000 Cash 7,500 Drawing 5,400 Equipment
18,500 Film Rental Expense
6,000 Miscellaneous Expense 4,000 Notes Payable 1,000 Rent Expense
10,000 Salaries Expense
7,000 Supplies 4,200
List are the account balances as of Dec 31,2009, of Mr.R.Gregg, owner of a movie theater. Prepare:
(a) An Income Statement
(b) Statement Of Owners’ Equity
(c) Balance Sheet