Hello folks, here we are again to discuss further on the ambiguity of accounting terms. Did you miss the last episode? here is the link for you to catch up on. Please click https://africanmusings.com/2022/04/10/removing-the-ambiguity-of-corporate-financial-accounts-and-literacy/
Now that we are familiar with some tips in accounting, we shall look into financial statements.
There are four types of financial statements namely:
- Statement of Financial Position or Balance Sheet
- Income statement also known as a comprehensive income statement or in layman’s terms like me, it is called a profit or loss statement.
- Change in equity Statement.
- Cash flow statements.
- Notes to the account
Statement of Financial Position or Balance Sheet: This financial statement shows the information on owners’ equity, the liability and the asset. The financial accounting equation is Asset = Liability + Owners Equity.
Statement of profit or loss (Income statement or Comprehensive): This shows the information on how the company is making a profit or a loss in a given time. It gives an account of the Revenue and Expenses of a business.
Statement of Change in Equity Statement: It shows the increase or decrease in the owners’ equity over time. Either based on reinvesting profit or reduction in equity due to external factors such as death, relocation of business etc.
Statement of cash flow: This statement shows all the Investing, Financing and Operating costs of an entity. In conclusion, While the investor is making a golden decision whether to invest? There are major 3 key factors an investor considers which answer the question should I invest? The key three factors are Return on investment, Time spent on investment and Risk associated with the investment.
Now we have seen how important financial statements are in making decisions, we shall look into the practical area of accounting as it is indeed using figures or numbers to form a report and in turn make an informed decision.
Notes to Account: Notes to the account is the explanation to the financial statement presented, it gives reasons why the figures are represented the way they are.
Also recall that we gave examples of Asset in the last episodes, let’s have more knowledge on the types of Assets.
Current Assets: These are short term investments that can easily be turned into cash within a year. They are used to cater for the day-to-day activities of a company e.g. stock inventory, fast moving office tools such as laptops and printers, cash equivalents etc.
Non-Current Assets: These are long term investments also known as Fixed assets – tangible assets (Property/Building, Vehicle, Land etc.) Noncurrent assets can also be subdivided into 2 categories namely:
Intangible Asset and Tangible Asset.
Intangibles assets are assets that cannot be seen or touched. Examples are license, trademark, computer software and copyright. While Tangible Assets are assets that can be touched or seen. Examples include buildings, lands etc.
The moral of these 2 episodes is for us to keep an open mind to new learnings and understand the terms used in accounting by breaking “big” accounting vocabularies into small relatable meanings.