Financial Statements and the Impact of TransactionsNicola Pennygar 2015

There are 3 sections to a Statement of Financial Position (Balance Sheet) Assets, Equity and Liabilities. The accounting equation is Assets – Liabilities = Equity. ( or Liabilities + Equity = Assets) The table below explain the basic content of each section

Section Details

Assets

Non-Current Assets

Current Assets

Non-Current Assets are items of property, plant & equipment that are purchased for use by the business with the intention that they will be kept for a long period. The cost of the asset is devalued over its useful life by a method of depreciation. The accumulated depreciation is reflected in the financial position statement and the yearly depreciation charge is shown as an expense in the Profit & Loss Account

Current Assets are short term assets such as inventory, receivables (debtors) cash in hand and cash in the bank.

Equity

Shares

Retained Earnings

The face value of shares

Profits that the business retains and not paid out in dividends. Could be used for investment purposes

Liabilities

Non-Current Liabilities

Current Liabilities

Non-Current liabilities are items such as long term loans, mortgages, debentures

Current Liabilities are short term obligations such as Vat Liability, payables (creditors), bank overdraft

Examples of impact of transactions

If I were to buy stock on credit terms for re-sale the impact would be an increase in current assets and an increase in current liabilities. I increased my current assets because I now have more stock, but I have also increased my current liabilities because I have not yet paid for it.

If I were to buy stock by cash, the impact would be an increase in current assets but at the same time a decrease in current assets. I have gained the stock but paid out the cash.

If I were to buy a piece of machinery with a long term loan, the impact would be an increase in my non-current assets but also an increase in my long term liabilities. The interest charged on the loan would be shown as an expense in the Profit and Loss Account.

Each transaction has a dual effect on the statements.