1. finance
2. accounting and auditing

Ambition
in Action
Interpret financial information
Introduction (week 1 & 2)
Introduction
Topic (1)
Access and interpret
financial
information
At the end of this topic you should be
able to:
 Define accounting terms commonly used in
the travel and hospitality sector
 Identify and explain the purpose of
accounting procedures
 Identify and explain the purpose of the
statement of financial performance
cont.
 Identify and explain the purpose of the statement of
Financial position
 Identify financial report required by a travel and
hospitality organisation
 Describe GST accounting and its impact on day to day
operation.
Introduction
 Accounting provides reliable and relevant financial
information useful in making decisions.
 It is a set of procedures and policies that allows
business to produce reports in a consistent and
concise manner.
cont.
 Financial information may include sales,
expenses, taxes and other figures.
 There are three steps to preparing financial
information: identification, recording and
communication
Cont.
 Financial information may not make a business
successful, but it helps the owner make sound
business decisions. It can also help a bank or creditor
evaluate the company for a loan or charge account.
 Financial information comes in many forms, but the
most important are the Financial Statements. They
summarize relevant financial information in a format
that is useful in making important business decisions.
Accounting terminology
 Week (1)
 Accounting Terms commonly use in
the travel and hospitality sector
Accounting Terminology
 Assets:
 What the business owns. Examples would include
equipment, motor vehicles, bank accounts.
 Assets are things of value that you own.
 Current Asset: all assets that are reasonably
expected to be converted into cash within one year in
the normal course of business.
 Current assets include cash, accounts receivable,
inventory,, prepaid expenses
 An asset is a possession of a business that will bring the
business benefits in the future
An asset is anything that will add future
value to your business.
Employees can even be seen as assets.
Land
Land
 Let’s take land. If you owned the
land, would it be an asset for your
business? Not sure? Well, do you
expect to receive benefits for your
business in the future from the land?
Of course. So what are the benefits
it will bring? Well, you can construct
a building on it that you can use for
business. Even selling it would bring
benefits, in the form of cash.
 What about a motor vehicle – is this an asset? Does it
have benefits for your business, and if so, what are
they?
 Answer: Yes, there are benefits for your business...
You can use the motor vehicle to pick up and deliver
goods. So yes, this is also an asset.
Cash?
 what about cash? Is cash an
asset? Answer: cash is certainly
an asset. What are the benefits
of having cash? Simple: you can
pay for things! That is certainly
useful (and indeed essential)
for a business.
Accounting Terminology
 Liabilities: What the business owes. Examples would
include mortgages, accounts payable.
 Current Liabilities: include short term debt, accounts
payable, accrued liabilities and other debts.
 Current Liabilities
 Current liabilities are short term debts that must be
settled in the current accounting period.

Terminology
 Non-current liability: A liability not due to be paid
within one year during the normal course of business.
A long-term debt issue is a noncurrent liability.
 Examples include a 30-year mortgage or a 10-year
Treasury note. See also: Long-term financing.
Liabilities =A debt of the business.
YOU --------------------> OWE --------------------> BANK
Accounting Terminology
 Expenses: The day to day costs of running a
business.
 It is any outlay(spending) required to operate
the business.
 Examples include rent, electricity and wages.
Fixed expenses
 Fixed expenses: Fixed expenses do not depend
on your consumption of a good or service.
 A fixed expense is a cost that does not change
from period to period or that changes only very
slightly.
 Example:
 Fixed expenses are usually paid on a regular basis,
such as week to week, month to month, quarter to
quarter or year to year.
 The fixed expenses are mortgage or rent payments,
car payments, real estate taxes and insurance
premiums.
 Variable Expense: Variable expenses change
depending on your consumption of a good or service.
 A variable expense is a cost that changes significantly
from period to period, such as week to week, month
to month, quarter to quarter or year to year.
 General expenses such as clothing, groceries, and car
maintenance and fuel, and utilities such as electricity,
gas and water.
cont.
 Owners Equity: The difference between Assets and
liabilities. It is the net worth of the business.
 Equity: also known as capital is the net worth of the
company.
 Equity comes form the owner’s investment in the
business, plus accumulated net profits that have not
been paid out to the owners.
Terminology
 Debtors: ( Account receivables) The people or
business that own money to your business. Also
known as accounts receivables.
 Creditors: The people or business that your business
owns money to. Also known as accounts payable.
In other words, it's the value of all the assets
after deducting the value of assets needed to
pay
Accounting as a whole is based on a single
equation:
ASSETS = EQUITY + LIABILITIES
 Would you invest in the following business?
Account equations Is
Assets =
Assets =
Claims
Liabilities + Equity
Liabilities are debts and obligations of a company.
Equity is what the company "owes" to owners. Equity is also called net
assets or residual equity.
The amount of total assets minus total liabilities equals equity. Because
equity equals the difference between assets and liabilities, it is also called
net assets.
example
Let us look at an example of the basic accounting equation.
Suppose a company has assets of $800, liabilities of $300, and
equity of $500. These amounts will be shown in the basic
accounting equation as follows:
Assets
=
Claims
Assets (A)
=
Liabilities
(L)
$800
Dr
=
=
$300
Cr
+
+
+
Owner
Equity
(OE)
$500
Cr
example
Assets (A)
-
Liabilities
(L)
$800
Dr
-
$300
Cr
=
=
=
Owner
Equity
(OE)
$500
Cr
cont.
 Budgets: A budgets is a financial ‘plan of action’ for a
business that represents the business’s goals in terms
of dollars and cents.
 It estimates future revenue, cash flow, expenses,
equipment needs, staff required and so on.
 Journal: Day book recording the day to day business
transactions.
cont.
 Invoice: An itemised bill containing the details of
goods and services provided, amounts owning and
payment terms.
 Revenue: The money earned from the sale of goods
and service.
Ambition
in Action
Week (3)
Week (3)
 Common Financial acronyms
Common Financial acronyms
 GST: Goods Services Tax
 GST is 10% tax that applies to most goods
and services sold or purchased in
Australia.
Business activity statement
 BAS: A BAS statement is a financial statement used
to calculate and report tax obligations and tax
claims to the ATO.
 All businesses must submit BAS statements to the
ATO within 21 days of the end of their reporting
period, which is either quarterly or monthly
depending on the nature of the business.
Pay as you go
 PAYG: is a system for reporting and paying
withheld tax amounts to the ATO.
 When employees are paid, tax is calculated and
withheld by the organisation. This amount is then
paid by the organisation to the ATO.
Australian Business number
 ABN: All business that have an annual turnover of
more than $ 50,000 must operate using ABN.
 If the business doesn’t include the ABN on
customer invoices income taxation will be incurred
at the highest rate.
 www.ato.gov.au
Week (3) cont.
Different types
of Budgets
What are the different types Budget?
 There are many types of budgets used
by organisations. Here are just a few
Department Budget
 Department budget shows the forecast revenue and
expenses for each department within an
organisation.
 For example: FO department budget, housekeeping
department budget, bar budget etc.
 Are prepared half-yearly and reviewed monthly by
department manager.
Master Budget
 A master budget combines the information from
various departmental and operational budgets into
one consolidated report.
Long term Budget
 Long-term budgets are used for periods exceeding
one year. They relate to the long-term goals of the
organisation.
 Example: the hotel has a budget to upgrade guest rooms over
a two year period.
Short term Budget
 Short-term budgets are prepared to support long
term budgets.
 They can be prepared daily, weekly, monthly
depending on the needs of the department.
Example: weekly budget for maintenance department
Cash flow Budget
 Cash flow budget allows managers to compare the
cash inflows and outflows to determine how much
cash the organisation will have at different stages
throughout the year.
 (if there is more money going out of the business than what
is coming into the business, management can recognise this
in advance and take appropriate action, such as chasing to
get account receivables, holding off on expensive
purchases)
Week (4-5)
Financial
Statements
Financial statements
 There are three main financial statements:
 Income Statement /Profit and Loss statement
 Balance Sheet
 Statement of Cash Flows
Financial statements
Profit and
Loss
statement
The Balance
sheet
•The statement of financial performance
( Profit and loss statement)
•The statement of financial position
Income Statement
 The Income Statement shows the revenue
and expenses of a business for a specified
financial reporting period.
 It also show the profit and loss the business
made within that period.
 (It is commonly referred to as a profit and loss
statement.)
Financial Statements ( cont)
 The profit and loss statement: it is a financial
report shows income and expenses and the
resulting profit and loss.
Profit and loss Statement
 Statement of financial performance:
 Formerly known as the profit and loss statement.
 This financial report shows income and expenses and
the resulting profit or loss.
 It is also known as income statement.
The Balance sheet
 Statement of financial position ( The Balance Sheet)
 This financial report shows what the business owns
and the resulting net worth of the business to the
owners.
 The Balance Sheet lists the balances in all Asset,
Liability and Owners' Equity accounts.

 Assets: Assets are things of value that you own.
 Current Assets: are those that are in the form of cash
or will generally converted to cash or used up within
one year, such as stock, cash in the bank and account
receivables (Debtors)
 Non current or fixed assets: are those that are
generally not converted to cash such as lien, furniture
and kitchen equipments.
Balance Sheet Sample
Cont.
 There are 5 types of Accounts.
1) Assets
2) Liabilities
3) Owners' Equity (Stockholders' Equity for a
corporation)
4) Revenues
5) Expenses
cont.
Assets
Liabilities
Owner
equity
Cash
Stock
Account
receivable
Food
inventory
Investments
Land
Building
Equipment
Furniture
China,
glassware
Bank loan
Capital
Withdrawals
Account
Stock
payable
Mortgage
(long term)
Revenue/
income
Expenses
Sale of
service or
goods,
Rent
received
Interest
received
Commission
Wages
Rent
Utilities
Insurance
Advertising
Repairs
Insurance
Depreciatio
n
Cash flow statement
 Cash flow statements show how much cash is
currently available.
 They are sometimes called a “ Statement of financial
performance”
 It is a movement of money in and out of a business.
Week (5)
Financial
Statements
(cont)
Why do we need to use these
statements?
Profit and loss statement is used
 Profit and loss statement are used to:
 compare your projected performance with actual
performance;
 compare your performance against industry
benchmarks;
 use past performance trends to form reasonable
forecasts for the future;
cont.
 show your business growth and financial health over
time;
 detect any problems regarding sales, margins and
expenses within a reasonable time so adjustments
may be made to recoup losses or decrease expenses;
 provide proof of income if you need a loan or
mortgage; and
 calculate your income and expenses when
completing and submitting your tax return.
Balance Sheet
 A balance sheet is a snapshot of a business’ financial
condition at a specific moment in time, usually at the
close of an accounting period.
Balance Sheet
 A balance sheet presents assets, liabilities and
owners' equity on a specific date. A balance sheet is
also called a Statement of Financial Position.
 A cash flow statement summarizes information
about cash outflows (payments) and inflows
(receipts). This statement may also include certain
information not related to actual cash flows.
What is a balance sheet used for?

A balance sheet helps a hospitality business owner/manager quickly
get a handle on the financial strength and capabilities of the business.
 Balance sheets can identify and analyze particularly in the area of
receivables and payables.
 Balance sheets, are used as basic elements in providing financial
reporting to potential lenders such as banks, investors, and vendors
who are considering how much credit to grant the firm.
Why is it important to record
financial information?
 Internal benefits:
 Information from financial records can be used to:
 Prepare budgets,
 Monitor and control cash flow
 Analyse various aspects of business operations
 Monitor productivity
 Plan for continuous improvement and future business
strategies.
 There are two broad categories of interested parties,
or accounting information users:
 external users
 internal users
 External users are parties outside the reporting entity
or company who are interested in the accounting
information.
 Types of external users include:
 Investors (i.e., owners), who use accounting
information to make buy, sell or keep decisions
related to shares, bonds, etc.
 Creditors (i.e., suppliers, banks), who utilize
accounting information to make lending decisions.
cont.
 Taxing authorities (i.e., Internal Revenue Service),
who need accounting information to determine a
company's tax liabilities.
 Customers, who may need accounting information to
decide which products to buy from which companies.
cont.
 Internal users are parties inside the reporting entity
or company who are interested in accounting
information.
 Types of internal users include:
 A company's senior and middle management, who
use accounting information to run the business.
 Employees who use accounting information to
determine a company's profitability and profit
sharing.
 Financial accounting provides information that is
designed to satisfy the needs of external users. Such
reporting is usually done in the form of financial
statements.
 Managerial accounting provides information that is
useful in running a company by internal users. Such
reporting is usually accomplished through customdesigned (or managerial) reports.
Financial Statement
 An income statement presents revenues and
expenses and resulting net income or net loss for a
period of time.
 An income statement is also called a Statement of
Operations, an Earnings Statement, or a Profit and
Loss Statement (P/L).
 Profit and loss statement exercises
 Week (3) excel
COG ( Cost of goods)
Week (6)
What is the cost of Goods?
 The cost of goods (COG) is the total amount it costs
the establishment to produce a product for sale.
 The cost of goods includes all associated costs
involved in selling the product.
Example
 A hotel purchases a small juice pack for just 10 cents
per serve.
 However to sell the drink, the hotel must pay for
ingredients, water, equipment maintenance,
electricity, paper cup, lid and straw – a total cost of
80 cents per serve.
 So the cost of juice pack may only 10 cents, the
actual cost of goods is 90 cents
What are the different types of stock
reports?
 There are many types of stock reports that can be produced
from the food and beverage point of sale ( POS) and / or
purchasing systems. Here are some example
 Stocktaking sheets and reports
 Purchase summary reports
 Stock reports
 Variance reports
 Wastage reports
 Sales reports
 Managers rely on the accuracy of these reports to determine
the cost of goods (COG)
How do stock reports assist in the
calculation of COG?
 Stock reports help managers calculate the cost of
goods. In the juice pack example the manager may
analyze:
 Purchase summary reports to see how much is being
spent on the juice pack.
 Sales reports from the POS system to see how many
juice drinks are sold.
 Waste reports to see how many drinks are poured
down the sink due to incorrect orders.
Why is it important to calculate the
cost of goods?
 COG is a major consideration for department
managers; they are always trying to control it or
reduce it.
 Even a small increase in the cost of goods, such as an
increase in delivery fees due to higher petrol prices,
can have a major impact on the cost of all stock items
ordered by a hotel, which reduces profit margins,
blows out budgets and affects the hotel’s net profit.
cont.
 Managers need to know the cost of goods to
determine:
 1. The breakeven point
 2. Percentage mark-up and
 3. Profit margin
Breakeven point
 The breakeven point is the point at which the
establishment is neither making or losing money;
 The amount of money generated from sales equals the
total amount of costs associated with selling the product.
 Managers need to know the breakeven point and how
much of every dollar earned above that amount is profit.
 For example: The juice drink’s cost is 90 cents, if the hotel
sold the juice drink for 90 cents, they would neither make
or lose money.
Percentage Mark up
 Mark- up is the amount that is added to the cost of
goods to make profit.
 For example, if the cost of the juice drink is 90 cents
and the hotel uses a standard percentage mark-up of
200%, the drink would be sold for $1.82 cent.
Profit Margin
 The profit margin is the estimated gross profit that
would be achieved by selling all the goods at full
selling price, less the cost of goods sold.
What are the different types of
activities reports
 Businesses use activity reports that are relevant to
their industry and specific operational needs.
 Managers rely on this information to make important
operational decisions such as how many staff to
roster, changes to menu items and or/prices,
quantities of food and beverage required, success of
advertising campaigns and son.
Cont.
 Here are the four example of activity reports
1. Daily revenue report
2. Daily room revenue summary report
3. In house activity report
4. Marketing report
Daily revenue report
 The daily revenue report provides a summary of all
revenue earned in the hotel/establishment that day.
 It is distributed to all department manages.
 This report gives an overall picture of the
performance of the hotel and individual departments
on that day.
 The daily figures are accumulated in the period to date (PTD)
column, indicating business performance so far. this figure
can then be compared to the budgeted figure, which will
indicate whether or not the department is achieving its
revenue goals.
Daily room revenue summary report
 A daily room revenue summary report is a simple report
produced from the front office operating system. It is
usually completed as part of the night audit process.
 It indicates the rate being charged for the room, the
number of guests and sometimes, the status of the
room.
 The total of each column indicates how much room
revenue was earned for that day and how many guests
are staying in the hotel.
In house activity Report
 An in-house activity report is a daily snapshot of each
department.
 Each department manager can use this information
to plan ahead and assess whether the department
will achieve its financial goals.
Marketing report
 Marketing reports show where the business has
gained its customers from, which assists
management to determine where to target their
marketing efforts.
 The following information will include:
1. source of business
2. Average length of stay
3. Average spend in each department
4. Type of customers
Accounting Cycle
Week (10)
The accounting cycle
The accounting cycle
Varify source of documents
Transaction (1)
Cash/Credit sales
Complete Financial
statements (5)
Profit and loss
statement/Balance sheet
Prepare Trial Balance
(4)
Post information
from sources of
documents to
Journals (2)
Post and categorise
journal entries into
ledger(3)
Account receivable/account payable
The accounting cycle
 Business transaction
 The accounting process begins with a business
transaction, such as a sale of goods or the
purchase of materials. This leads to a financial
transaction, which may be cash paid or received,
or money owing(account receivable).
Source documents
 Source documents
 Every time a business transaction occurs(sells food
in a restaurant, drinks in bar, accommodation etc)
a record for the transaction is happened at the
time.
 These record is called a source document.
 A source document in a manual accounting system
is a paper form, docket or note which records
details of a transaction and provides evidence that
the transaction took place.
cont.
 they assist internal control of the resources of the
business - making sure that there is documentary
evidence to support the purchase or sale of items and
the receipt and payment of money (that is, it makes it
more difficult for people to misappropriate or steal
cash or other items).
Receive source documents
 Some examples of source documents are:
 Receipts,
 Invoices
 Credit card merchant copy
 Restaurant documents
 Guest account
 Purchase orders
 Bank statement
2. Enter transactions into journal
 Journal means daybook.
 The transaction recorded from the source documents must be
analysed and recorded in the journal.
 There are four common types of journals in which the
transactions are entered. These are:
 Cash receipts
 Cash payments
 Credit sales
 Credit purchases
3. Enter transaction into ledgers (
book of final entry)
 Hotel and motels or any other establishment
offering accommodation post to additional ledgers
not used by other businesses for example:
 The advanced deposit ledger,
 The guest ledger or transient ledger
 the city ledger or direct debit
March 20, the company made a cash sale for
$100.
1) Is Cash used in this transaction? Yes.
2) Was Cash received or paid?
Received. [Increase = Debit Column]
--- enter the Cash portion of the journal entry
Date
Account
Debit
Mar-20
Cash
$100
Credit
3) Enter the balancing dollar amount in the opposite
column from Cash.
Date
Mar-20
Account
Debit
Cash
$100
Credit
$100
This is a sale, so we will use Sales Revenue for
the Credit side of the journal entry.
Date
Account
Debit
March- 20
Cash
$100
Sales revenue
credit
$ 100
4. Prepare the trial balance
 At this stage, the account will be divided into debit or credit
balance.
 The total of the debit must equal the total of the credit.
5. Prepare financial statements
 Financial statements are prepared on a regular basis
and assist owners and managers.
 They show how well the business has been operated,
whether it made a profit or loss and how much the
business owns and owes to others parties.
Statement of financial performance
 The income and expenses and the profit or
loss of a business is shown in the statement
of the financial performance for a given
period of time.
The key information provided by the
statement of financial performance
is:
 Income earned/Revenue
 This is the cash flow received in exchange for goods
and services provided in day to day operations.
 Cost of goods sold: This is the calculation of the actual
cost of selling the good.
 A raw good is turned into something else and the sold.
 Cost of goods sold = opening inventory + purchase closing inventory
cont.
 Gross profit: This is revenue less cost of goods sold.
The resulting gross profit shows profit left to cover
all operating expenses.
 Operating Expenses: These are expenses a business
incurs in normal day to day operations.
 ( rent, stationery wages etc)
 Net Profit/Loss: The gross profit less operating
expenses.
Statement of financial position
 It shows the financial state of a business at a give
date.
 It lists the value of everything the business owns and
everything the business owes to other parties and it’s
net worth.
 It shows the assets, liabilities and owners’ equity of
the business entity at a particular time.
Account equation
 In other words, each asset has its own source provided by an
owner or creditor. So, there can't be a claim without an
appropriate asset and vice versa. Based on this statement,
we can define the basic accounting equation as:
 Assets = Claims
 Claims are divided into two categories:
 Creditors' claims that are called liabilities
 Owners' claims that are called equity
week (11)
Double Entry
Double entry
 The double-entry rule states that any
transaction is recorded at least twice.
 Because this transaction provided assets to
the company, it is called an asset source
transaction.
Debit and credit
 A debit transaction increases assets and
decreases liabilities and equity.
Assets
(What you own)
+
Liabilities
(What you owe)
-
Equity
(How much the
company is worth)
-
Debit and credit
 A credit transaction increases liabilities and
equity and decreases Assets.
Assets
(What you own)
-
Liabilities
(What you owe)
+
Equity
(How much the
company is worth)
+
The format of T account
Account classification
Rule of increase
Rules of decrease
Asset
Debit
Credit
Liability
Credit
Debit
Equity
Credit
Debit
Revenue
Credit
Debit
Expense
Debit
Credit
T Account
Asset
Debit
Asset goes up, we will
call it “Debit”
Liability & Equity
Credit
If liability or equity goes
up we will call it “Credit”
If asset goes down, opposite
If liability or equity goes
of debit, we will call it
down we will call it Debit
Credit
Revenue ( sales, income) increase equity so Rev= Credit, but
expense decrease equity so Exp is called debit
T Accounts
Cash
rev
A/P
A/R
1000
1000
5000
5000
600
600
2000
2000
2400
3000
5400
400
5000
5400
 http://www.youtube.com/watch?v=99LTqkxzBpA&fea
ture=related
 Let us know examine how different transactions
affect the basic accounting equation. We will take a
look at several transactions separately.
 1) Friends Company is created when the owners pool
$5,000 into the business. The effect of the
contributions on the accounting equation is as
follows:
example
Claims
Assets
=
+$5,000
=
Liabilities
+
Equity
+
+$5,000
Note that the amount of this single transaction is recorded
twice. The first time it is recorded as an asset and the
second time it is recorded as equity (the asset source). In
accounting any transaction is recorded at least twice, as a
rule. This rule is known as double-entry bookkeeping.
 Note:
 In double entry accounting, for every debit
transaction there is an equal credit transaction.
example
 Next, assume that Friends Company acquires an
additional $2,000 of assets by borrowing cash from
creditors (e.g., taking a loan from a bank). This is
also an asset source transaction. In the table below
the beginning balances are derived from the ending
balances of the previous transaction:
example
Claims
Assets
=
Liabilities
Beginning balance
$5,000
=
Effect of borrowing
+$2,000
=
+$2,000
Ending balance
$7,000
=
$2,000
+
Equity
+
$5,000
+
$5,000
 let's assume that Friends Company received $3,000
cash for services it provided to customers.
 Note in the illustration below that both assets and
retained earnings increase which is a characteristic of
an asset source transaction.
Equity
Assets
= Liabilities +
Beginning balance
$7,000
=
Effect of revenue
+3,000
=
Ending balance
$10,000
=
$2,000
+
Contributed
Capital
+
Retained
Earnings
$5,000
+
$0
+
+3,000
+
$3,000
+
$2,000
+
$5,000
 Assume Friends Company used $1,000 in
assets to earn the $3,000 (see above) in
revenues. This is an example of an asset use
transaction.
Equity
Assets
=
Liabilities
+
Contributed
Capital
+
Retained
Earnings
Beginning balance
$10,000
=
$2,000
+
$5,000
+
$3,000
Effect of expenses
(1,000)
=
+
(1,000)
Ending balance
$9,000
=
+
$2,000
+
$2,000
+
$5,000
 Take a note of how decreases or negative
amounts are shown in accounting records.
Instead of prefixing a minus sign ("-"), a
number is taken into parenthesis. This is a
common way of showing a decrease in
accounting.
 If a business chooses to transfer part of its assets
(particularly its retained earnings) to the owners, the
transfer is called distribution. Assume Friends
Company transfers $500 of assets to its owners. This
is an asset use transaction:
Equity
Assets
= Liabilities +
Beginning balance
$9,000
=
Effect of
distribution
(500)
=
Ending balance
$8,500
=
$2,000
+
Contributed
+
Capital
$5,000
+
$2,000
+
$5,000
Retained
Earnings
+
$2,000
+
(500)
+
$1,500
Equity
Assets
=
Liabilities
+
Contributed Capital
+
Retained Earnings
$0
=
$0
+
$0
+
$0
Effect of contribution
+5,000
=
+
+5,000
+
Effect of borrowing
+2,000
=
Effect of revenue
+3,000
Effect of expenses
Beginning balance
+2,000
+
+
=
+
+
+3,000
(1,000)
=
+
+
(1,000)
Effect of distribution
(500)
=
+
+
(500)
Ending balance
$8,500
=
+
$1,500
$2,000
+
$5,000
 Using the five transactions described above, we can
now prepare the company financial statements for
the period. Recall that there are four general-purpose
financial statements:
 Income Statement
 Statement of Changes in Equity
 Balance Sheet
 Statement of Cash Flows
 Income statement
 presents revenues and expenses and resulting net
income or loss for a period of time. An income
statement is also called Statement of Operations,
Earnings Statement, or Profit and Loss Statement
(P/L).
Friends Company
Income Statement
For the Period Ended 20X6
Revenue (i.e., assets increase)
3,000
Expenses (i.e., assets decrease)
(1,000)
Net Income (i.e., change in net assets)
$ 2,000
 Net income is the excess of revenues over expenses
for an accounting period.
 Net loss is the opposite of net income. Net loss
results from the excess of expenses over revenues for
an accounting period.
Friends Company
Statement of Changes in Equity
Period Ended 201x
Beginning Contributed Capital
$0
Plus: Capital Acquisition
5,000
Ending Contributed Capital
5,000
Beginning Retained Earnings
Plus: Net Income
Less: Distribution
Ending Retained Earnings
Total Equity
$0
2,000
(500)
1,500
$ 6,500
Friends Company
Balance Sheet
Period Ended 20X6
Assets
Total Assets
$8,500
8,500
Liabilities
Equity
Contributed Capital
Retained Earnings
Total Equity
2,000
5,000
1,500
6,500
Total Liability and Equity (Claims)
8,500
 Cash flow statement
 summarizes information about cash outflows
(payments) and inflows (receipts). This statement
may also include certain information not related to
actual cash flows.
Friends Company
Statement of Cash Flows
For the Period Ended 20X6
Cash Flows from Operating Activities
Cash Receipts from Customers
$3,000
Cash Payments for Expenses
(1,000)
Net Cash Flow from Operating Activities
Cash Flows from Investing Activities
2,000
0
Cash Flows from Financing Activities
Cash Receipts from Borrowing
2,000
Cash Receipts from Capital Acquisitions
5,000
Cash Payments for Distributions
(500)
Net Cash Flow from Financing Activities
6,500
Net Increase in Cash
Plus: Beginning Cash Balance
8,500
0
Ending Cash Balance
$8,500
 Let us demonstrate the usefulness of the horizontal model and
apply it to the five transactions we covered earlier. Note that if a
transaction does not affect the model, a related cell in the table
below shows "n/a". In the statement of cash flows, FA means
cash flows from financing, IA means cash flows from investing,
and OA means cash flows from operating activities.
 Obtained capital acquisition: $5,000
 Borrowed cash: $2,000
 Received cash revenue: $3,000
 Paid expenses with cash: $1,000
 Distributed cash to owners: $500
Balance Sheet
Event
No
Income Statement
+
Equity
Rev.
-
Exp.
=
Net
Income
Cash Flow
Cash
=
Liabilitie
s
1
5,000
=
n/a
+
5,000
n/a
-
n/a
=
n/a
5,000
FA
2
2,000
=
2,000
+
n/a
n/a
-
n/a
=
n/a
2,000
FA
3
3,000
=
n/a
+
3,000 3,000
-
n/a
=
3,000 3,000 OA
4
(1,000)
=
n/a
+
(1,000)
n/a
-
(1,000)
=
(1,000) (1,000) OA
5
(500)
=
n/a
+
(500)
n/a
-
n/a
=
Totals 8,500
=
2,000
+
6,500 3,000
-
(1,000)
=
n/a
(500)
2,000 8,500
FA
 http://www.youtube.com/watch?v=99LTqkxzBpA&fea
ture=related
Week (13)
General Journal
 General Journal
 General journal includes all the business transactions
which are recorded in the chronological manner, i.e.
day by day. there is a mandatory data to be present in
any journal





This data is:
date of transaction;
names of accounts which are debited and credited
description of the transactions
columns for debit and credit where exact figures of
business transaction are recorded.
 . In the picture below you can see how the general
journal looks like and what information is included
there.
General Ledger
Next step to record any sample general ledger
journal entry is to post transactions recorded in
the general journal to the general ledger accounts.
The accounts classify accounting data into certain
categories, the main of which are:
Assets
Liabilities
Equity
Revenue
Expenses
We will be analyzing the following transactions of
XYZ company in December of the year 20XX:
1. December 15 - shareholders established XYZ
company and invested cash of $12000. This is a
trading company reselling furniture and also
providing furniture maintenance services;
2. December 17 - Acquired on account land
costing $15000 and building for cash $10000;
3. December 19 - acquired on account supplies
costing $1200 and goods (furniture) for resale for
$6000;
4. December 20 - Provided services to customers
for cash, i.e. for $570
 Journalizing and posting 1st transaction:
 On December 15 shareholders established company
XYZ by investing cash. First step is to journalize the
transaction, i.e. record it in the general journal. The
following entry is being done:
 D Cash $12000
 C Share Capital $12000
 Journalizing and posting 2nd transaction:
 On December 17 the company XYZ acquired on
account (i.e. cash for the acquisition will be paid on
the later agreed date after the purchase) land cost of
which is $15000 and for cash building cost of which is
$10000. The following entry is being done:
 D Land $15000
 D Building $10000
 C Accounts Payable $15000
 C Cash $10000
 Journalizing and posting 3rd transaction:
 On December 19 the company XYZ acquired on
account supplies cost of which is $1200 and inventory
for resale cost of which is $6000. The following entry
is being done:
 D Supplies $1200
 D Inventory $6000
 C Accounts Payable $7200
 ournalizing and posting 4th transaction:
 On December 20 the como any XYZ provided services
to the customers for $570 and the customers paid by
cash. The following entry is being done:
 D Cash $570
 C Revenue $570
http://www.bookkeeping-financial-accountingresources.com/general-ledger-tutorial.html