The first financial statement usually prepared is the profit and loss account (income statement). As a rule, it shows l)revenue, 2)expenses, and 3)net income or 4)net loss for a business for a period time. The income statement compares the revenue earned for a period of time with the expenses incurred for the same period. If the revenue exceeds the expenses, the excess is known as a net income. If total expenses are greater than revenue, the resulting difference is known as a net loss. The business and investment community uses this report to determine investment value, creditworthiness and income success. The last statement in financial statements is the flow of funds and cash. presents cash receipts, from operating activities, investing activities and financing activities. It also demonstrates to shareholders and other interested parties how the funds would change. In just demonstrates all the movement into and out of the company.
An understanding of financial statement information requires knowledge of the generally accepted accounting principles (GAAP) may be described as rules adopted by the accounting profession as guides in measuring, recording and reporting the financial info. Many authors, like K.Larson, R.Hermanson, I.Adward and others distinguish four generally accepted concepts and eight generally accepted principles. Accounting concepts:
-Business Entity Concept
-Periodicity Concept - an entity's life can be subdivided into time periods (month, year) for the purpose of reporting the results.
Basic Accounting Principles:
1. Cost Principle
2. Objectivity Principle
3. Realization Principle
4. Matching principle
Future over reading principles
1. Materiality Principle
2. Full-Disclosure Principle - nothing enough information should be provided to make the reports understandable.
3. Consistency Principle
Types of assets and liabilities
Assets are the things that are owned by any business organization. In order for an item to be considered an
asset, it must meet two requirements: 1) it must be owned by the organization 2) it must have money value.
All assets may be considered to be tangible (can be seen, touched and they are physical assets) and intangible (is without physical qualities, but has a value based on rights. are patents and franchises, its also include copyright, goodwill and trademarks. Tangible assets consist of current, fixed assets and investments. Current assets are cash, accounts receivable and supplies. Fixed assets are [property, plant, equipment. are land, buildings, machinery. Examples of investments are stocks and bonds of other organization. Liabilities are defined as may be either short-term or long-term obligations. Also there is 'contingent liability'; it is a liability would only arise if and when that other person defaulted on his obligations.
Capital is the ownership of the assets of the business by the proprietor. There is a difference between capital and equity. Capital is a contribution of assets to the business in beginning a business, but equity is a business
Basic accounting equation is as follows: Assets=Capital+Liabilities. In other words Assets is Equity plus Liabilities, where assets are simply what is held in the business, equity is the claim of the owners, and liabilities are the claims of third parties. By transferring liabilities to the other side of the equation we may write Assets minus Liabilities is Equity or, using a technical term Net Assets is Equity. Finally we may split equity into the capital and reserves. Reserves profits which have been reserved or kept in the business. The equation now becomes Net Assets is Capital plus Reserves. Revenues, expenses and profits. A profit is realized through revenue earned by an organization as the result of the sale of a service or product. The revenue is an increase in the capital of the owner. Profit and revenue are not the same. Profit represents the income that a business has earned after certain deductions have been made from revenues. Every business, , must have certain costs in order to operate: these costs are known as expenses. All businesses exist for the purpose of earning a profit An excess of revenue over expenses represents a profit If expenses exceed revenue, the result is known as a loss.. Shareholders' equity. The proprietor in the beginning a business contributes assets to the business. These assets may consist of cash, supplies or equipment. the assets contributed represent the proprietor's ownership or equity in the business. Shareholder's equity is assets minus liabilities. In other words shareholders' equity is Net Assets, which include share capital (money received from the issue of shares), sometimes share premium (money realized by selling shares at above their nominal value), and the company's reserves,. Most companies today are multinational and they use consolidate accounting. Consolidate accounting is the combined accounts of all the members of a group of companies such accounts show the profit and losses, assets, liabilities of the companies as a whole.
Accounting in Russia.
The objectives of financial statements in RAS (Russian Accounting Statements) and IAS (International) systems are different. According to IAS, the purpose of financial statements is 1) to supply potential and existing investors and creditors with reliable and truthful information about the company's financial situation. Information presented in Russia financial statements is oriented towards the demands of tax authorities and cannot be used by investors for analyzing the situation of the company. 1) RAS ignore inflation, while IAS describes the certain period of time. Ratios analysis.
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