Accounting Basics Part 1

Depending on who you ask, there are 4 plus 1 main elements of financial Statements. The 4 main elements would normally take a page each within the financial statement  and the note (the plus 10 gives meaning to some of the transactions / movements in the financial statement and the notes could be 90% of the whole financial statement.

In Nigerian we use the Internantional Financial Reporting Standard (IFRS). Futhermore, here is the list of the Main elements of the financial statement:

• Statement of Financial Position (SOFP), formerly called a Balance sheet
• Statement of Profit or Loss (SoPoL), also called income statement. There is also the other comprehensive income which is a statement for handling the non-recurring profit / loss transaction.
• Statement of Cash Flow (SOCF) or Cash flow Statement
• Statement of Change in Equity (SOCE)
• The plus one, Notes to the Financial Statement

Tools of trade for a business could be termed as THE RESOURCES OF THE ENTITY. This is usually equal to SOURCES OF FINANCE.

Recognised Sources of Finance

Debt Finance – Liabilities

Equity Finance – Owners Equity

In Financial accounting, we have 5 main account which are spread into two elements of the financial statement:

Assets, Liabilities, Owners Equity, Revenue and Expense

Statement of Financial Position (Equation)

SOFP shows the financial condition of an entity at a particular point in time. It is also called a Balance sheet. There is a basic accounting equation that describes what goes on here and it is as follows.

Assets  =  Liabilities  +  Owners Equity

Statement of Profit or Loss

This statement tells the users of the financial statement if the entity in question is making a profit or loss. Furthermore, it is calculated over a period, with most periods being either every month, every quarter or every year.

For a period, there are two main things for an entity, accomplishments and efforts.

Accomplishments were what was gained and efforts are what was used to reach those accomplishments.

Accomplishments  >  Efforts  =  Profit (Gain)

Accomplishments  <  Efforts  =  Loss

Accomplishments  =  Revenue (Sales, Turnover)

Efforts  =  Expenses

Hence, the basic equation is as follows:

Profit or Loss  =  Revenue  –  Expenses

The two elements of financial statements above show how the 5 main account in financial account are spread, with Assets, Liabilities and Owners Equity in the statement of Financial Position (SOFP) (Balance Sheet) and Revenue and Expense in the Statement of Profit or Loss (SoPoL) (Income Statement).

To explain the different accounts

• Assets: These are resources that are used to generate inflows (present or future);
• Liabilities: These are obligations arising from past events, resulting in outflows. They can also be current or non-current;
• Owners Equity: This is basically the money which would be returned to the shareholders of a company if all the assets were liquid and all the debts held by the company was paid off;
• Revenue: This is the gross inflow of economic benefits arising from the ordinary operation of the entity;
• Expense: this is the cost of operations that a company incurs while trying to generate revenue.