the statement are prepared from the book of account and other records maintained by the enterprise
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Have a vast network of over 32 million units
Create employment of about 70 million
Manufacture more than 6000 products
Contribute about 45% to manufacturing output and about 40% of exports, directly and indirectly.
er is lower, is followed. Then for balance sheet purposes, valuing assets at cost less depreciation is followed.
ng the year.
III. What Are The Basic Financial Statements?
The end of the financial accounting process is the set of reports called financial statements. These reports communicate your financial information to internal and external users. This further helps them in planning, decision-making and exercising control.
Accordingly, the Generally Accepted Accounting Principles (GAAP) requires your entity to prepare 3 such reports:
balance sheet (or statement of financial position) that summarizes the financial position of your entity at the end of an accounting period
income statement (or profit and loss statement) that summarizes the results of your business operations for a given period
A statement of cash flows that summarizes your entity’s operating, financing and investing activities over a period of time
These reports can be classified in one of the two categories: 1) stock or status reports and 2) flow reports. The stock reports give a snapshot of the resources and obligations of your entity at a specified point of time. And the flow reports give an account of the activities of your entity over a specified period of time. Accordingly, balance sheet is a stock report while income and cash flow statements are flow reports.
Balance Sheet
The balance sheet is a report that showcases the financial position of your business entity at a particular time. It reports about your firm’s economic resources (assets), economic obligations (liabilities), and residual claims of owners (owners’ equity).
Accordingly, a balance sheet has two sides: the left, assets and the right, liabilities and owner’s equity. Assets are the economic resources of your entity while equities are claims against these assets. Further, equities are of two types: 1) liabilities, which are claims of creditors and 2) owner’s equity, which are your claims as the owner of the business.
Now, all the assets of your business are claimed by either creditors or owners. Additionally, these claims cannot exceed the amount of assets to be claimed. Therefore, it follows that:
3. Owner’s Equity
Capital stock
Ahe results of your business operations for an accounting period. It explains few of the changes in the assets, liabilities and equity of an entity between two consecutive balance sheets. It provides information relating to return on investment, risk, financial flexibility, and operating capabilities.
The income statement is prepared keeping into consideration two primary accounting principles.
Principle of Accrual Accounting
The first is the principle of accrual accounting. Accordingly, the performance of your entity can be measured only if revenues and related costs are accounted for during the same time period. This mandates recognizing the expenses incurred to generate revenues in the same period. For instance, the cost of a machine is not recognized as an expense in the period it is purchased. Rather, the cost is recognized as an expense in the form of depreciation over its useful life. This is because the machine is used in production.
Principle of Classification of Expenses
The second principle is the classification of expenses into operating, financing and capital expenses. Operating expenses are those that provide benefits only during the current period. Financing expenses refer to the expenses relating to non-equity financing used to raise capital for your business. And capital expenses are the ones that generate benefits over long periods of time.
An illustration depicting components of income statement which is one of the basic financial statements of an entity
Accordingly, in the current period, operating expenses are subtracted from revenues to arrive at operating earnings of the firm. Then, financing expenses are subtracted from operating earnings to estimate net income or earnings to equity. The capital expenses, however, are written off over their useful life as depreciation or amortization.
Hence, a typical income statement showcases all the items of profit and loss recognized during the period. Although, few items like previous period adjustments go directly into the retained earnings. The following graphic demonstrates the income statement format based on the generally accepted accounting principles: