One Plus one Is Two

A. The Accounting statements

There are three major accounting statements that you must understand.

A1. The income statement/statement of comprehensive income

This tells you how you have performed in the previous accounting period; it is the financial history book. The 'P&L' matches up the incomes you have earned by running your business with the actual running costs incurred in earning those incomes. There are a number of accounting conventions which dictate how costs are allocated to the profit and loss account and we will examine some of these later in this session.

The balance sheet/ statement of financial position

This is purely a position statement that shows how the business finances look at a point in time - a financial snapshot. It will firstly add the value of all the business possessions or assets and then equate this to the total finance invested in the business from various sources. These two amounts must always balance each other.

The cash flow statement

This is a statement of flow of cash and cash equivalents, unencumbered by accounting concepts and conventions. It will reveal with much more clarity whether an organisation can meet its commitments. The three main activities are operating, investing and financing.

A2. The basic accounting classifications are:

Balance sheet categories Assets Liabilities

Profit and loss account categories Incomes Expenses

These classifications are important as the difference between incomes and expenses is profit, or surplus, and the assets and liabilities show the financial position on the balance sheet.

There are of course many sub divisions of these which are specific to the organisation. Your expenses for example may be classified into travelling, stationery, entertainment, salaries etc.

Activity

Classify the following items.

asset liability equity expense income

Bank

Capital

Premises

Stock

Creditors

Debtors

Sales

Telephone

Travel costs

Painting and maintenance

Premises rebuilding

Computer equipment

Computer software

Delivery of equipment

Rent from tenants

Printing and stationery

Printing equipment

Now complete the following activity.

The following example shows how it all fits together. Don't worry if you do not understand all the details of the statements. We will be looking at them in more depth later ... At this point, the important thing is to see the different kinds of information recorded in the various statements.

* You want to start a business and you put in R20 000 of your own money.

* This is not enough, so you obtain a bank loan of R10 000.

* With this you purchase premises, costing R15 000. You equip the premises at a cost of R10,000