Accounting – The Pensky File
It is important that you have an understanding of financial documents that are used in businesses to record transactions, summarise their financial position and indicate their financial performance.
Flow of Accounting Information
All financial transactions of a business are drawn up into a variety of documents, starting with the journal entries.
JOURNAL
LEDGER
TRIAL BALANCE
REVENUE STATEMENT
BALANCE SHEET
1. Journals – these are documents that record all accounting transactions for the business in chronological order i.e. as they occur.
2. Ledger Accounts – this is where information from the journals is summarised. These combine all the transactions from the journals into ledgers of similar types of transactions. This could be for any cash transactions, sales transactions, general expenses etc.
3. Trial Balance – the information from the ledger accounts is all grouped together to ensure that there have been no errors in the recording stage. The information from this document is used to draw up the financial statements used to interpret the financial position and performance of the business.
4. Revenue Statement – this indicates the financial performance of the business over a period of time by looking at how much profit the business has earned over the period. 5. Balance Sheet – this illustrates the current financial position of the business by showing all the accumulated wealth of the business and how this wealth was financed. 1
The Balance Sheet
A balance sheet shows a snapshot of the financial position of a firm at a point in time. For this reason it is also called the Statement of Financial Position.
The balance sheet indicates all of the accumulated assets of a firm (what it owns) and how these assets as a whole have been financed (what it owes). It revolves around the accounting equation:
Assets = Liabilities + Owners’ Equity
N.B. This formula can be rearranged so that OE = A – L
Assets – the accumulated wealth and total value of the business. These can be broken down into: Current Assets – assets that will usually be transferred into cash within 12 months Non-Current Assets – assets that will usually be held and used by a business for a year or more i.e. a longer useful life
Liabilities – the total amount of debt held by the business i.e. what it owes to others outside of the business. These can also be broken down:
Current Liabilities – debts that will need to be repaid within 12 months
Non-Current Liabilities – long-term debts that the business will repay over more than a year
Owners’ Equity – the value of the business once all debts have been paid i.e. what the business owes the owners of the business. It is considered the net worth of the business.
The Balance Sheet is useful for a variety of stakeholders as it shows the business’ stability by examining debt levels (called gearing or leverage), ability to access cash (the liquidity of the business) and what the return is for the owners (the profitability of the firm).
A typical Balance Sheet will be set out as follows:
Balance Sheet for Pensky Pty Ltd as at 30 June 2011
ASSETS
Current Assets
Cash
Accounts Receivable
Non-Current Assets
Equipment
Investments
$
LIABILITIES
Current Liabilities
Accounts Payable
31,600
3,200
34,800
Non-Current Liabilities
Business Loan
17,500
3,000
20,500
TOTAL LIABILITIES
OWNERS’ EQUITY
Capital
Net Profit less Drawings
TOTAL
55,300
TOTAL
2
$
5,150
5,150
20,000
20,000
25,150
30,000
1,150
(1,000)
30,150
55,300
Exercises
1. Classify each of the following as current assets, non-current assets, current liabilities, noncurrent liabilities or owners’ equity:
a) Inventory
