Running Head: FINANCIAL ACCOUNTING CONCEPTS

Financial Accounting ConceptsFinancial Accounting Concepts

An 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:

INCOME STATEMENT
S.NO DATE DESCRIPTION AMOUNT
Sales
1 30-Jun        Cash 3540
2 30-Jun       Accts receivable 8380
Total sales 11920
Expenses
3 1-Jun       Furniture 500
4 2-Jun       Dental Supplies (on account) 5000
5 2-Jun       Dental supplies expense(actual) 1500
6 2-Jun       Office rent 1200
7 15-Jun       Hygenist salary 750
8 30-Jun       personal expenses 300
9 30-Jun       Hygenist salary 750
10 30-Jun       Electricity bill 250
Total Expenses 5000
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:

BALANCE SHEET
S.No DATE DETAILS AMOUNT
Assets (Fixed)
1 1-Jun        Equipment 23,000
2 2-Jun        Furniture 500
Total Fixed assets 23,500
Current assets
3 1-Jun        Cash deposit 20,000
4 30-Jun        Accounts receivable 8380
Total Curent assets 28,380
TOTAL ASSETS 80,260
Current liabilities
3-Jun         Insurance 3,000
30-Jun         Expenses 5,000
2-Jun         Balance on supplies 3,500
30-Jun         Utility bill 250
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:

OWNER’S EQUITY
S.No DATE DETAILS AMOUNT
1 1-Jun          Cash investment 20,000
2 1-Jun        Equipment and supplies 23,000
Liabilities
3 3-Jun         Insurance 3000
4 30-Jun         Personal expenses 300
Net Owner’s equity 39,700

The amount of 39,700 reflects Dr. Leo’s net investment in the Company.

References Cited:

  • Understanding Financial Statements”. (No Date). Retrieved 09/01/2005 from

URL:  http://bizzer.com/images/Financial/finstmt_14.html

  • “Preparation of Income Statement, Balance Sheet and Cash flow statements”

Retrieved 09/01/2005 from URL:

http://cbdd.wsu.edu/kewlcontent/cdoutput/TR505r/page45.htm

  • “Statement of Changes in equity”: retrieved 09/01/2005 from URL:

http://www.toolkit.cch.com/text/P06_7050.asp

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