Running Head: FINANCIAL ACCOUNTING CONCEPTS
Financial Accounting ConceptsFinancial Accounting ConceptsAn Income Statement reflects the differences between the revenues and expenses of a business over a period of time. Therefore, the items that are considered under this account are the Sales – which includes both cash and credit sales. Expenses include the cost of goods, which consists of all the expenses that are incurred by a business – from the stage of purchase of raw materials to the actual sale of the goods, including the overhead costs.(www.cbdd.wsu.edu, n.d.). Income statements do not reflect all the assets and liabilities of the Company. These are represented in a summarized, consolidated statement that shows the overall financial position of the Company and provides information on assets, liabilities and owner’s equity.
Equity holdings are represented in financial statements as separate accounts that are listed under “Liabilities and Owner’s equity” (Financial statements, n.d.). Equity is listed under the liabilities section of a Company’s financial statements, because it would constitute a claim upon the assets owned by the Company. In a financial statement, the equity account provides a complete financial picture of the organization under this category of liabilities owed by the Company in the event of a financial crisis, although not all available equity may be active in a particular financial period.
Therefore, in Dr. Leo Krusack’s accounts, furniture and equipment would qualify as assets, while Leo’s deposits from his own funds would be construed as owner’s equity. Two categories of costs exist – fixed and variable. Costs such as utilities, rent and salaries would come under the category of variable costs while expenses on furniture would be fixed costs. Sales made on credit would be classified as “Accounts receivable” while any pending payments Dr. Leo has to make, such as the electric bill and medical supplies, would be classified as “Accounts payable”. Quarterly insurance payments are entered as “pre paid expenses”.
On the basis of the above, Dr. Leo’s Income statement for the month of June would be as follows:
|4||2-Jun||Dental Supplies (on account)||5000|
|5||2-Jun||Dental supplies expense(actual)||1500|
|Gross Profit before interest and tax||6920|
The Balance Sheet reflects the position of assets and liabilities of the firm. This would take into account fixed assets and liabilities of the Company, unlike only expenses and revenues which are reflected in the Income Statement and cash show statement, which details the inflow and outflow of cash. The Balance Sheet provides a summarized financial picture of Dr. Leo’s business and provides an estimate of the net working capital that he has on hand for investment purposes. Also, any outsider who is interested in examining the financial position of Dr. Leo’s company and whether or not it is in a healthy position will be able to glean the information from the balance sheet, which provides all the relevant information in a concise form as given below:
|Total Fixed assets||23,500|
|Total Curent assets||28,380|
|2-Jun||Balance on supplies||3,500|
|Total Current liabilities||11,750|
|NET WORKING CAPITAL||56,760|
The Owner’s equity statement reflects the extent to which an owner has invested in the business. This will therefore be reflected as a liability for the business, because the amount will have to be repaid to the owner. The statement will be as follows:
|2||1-Jun||Equipment and supplies||23,000|
|Net Owner’s equity||39,700|
The amount of 39,700 reflects Dr. Leo’s net investment in the Company.
- Understanding Financial Statements”. (No Date). Retrieved 09/01/2005 from
- “Preparation of Income Statement, Balance Sheet and Cash flow statements”
Retrieved 09/01/2005 from URL:
- “Statement of Changes in equity”: retrieved 09/01/2005 from URL: