Preparation of Financial Statements

The assignment content discusses the accounting cycle, which involves preparing financial statements such as income statements, equity statements, balance sheets, cash flow statements, and notes to financial statements. The post-closing trial balance is also covered, where nominal accounts are closed and real and personal accounts are shown in the balance sheet. The accounting equation is discussed, showing the relationship between assets and liabilities, and its expanded form is also explained. Finally, the assignment includes a quiz with multiple-choice questions on various accounting concepts.

Course Topics

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Course Topics (Fundamental accounting and equation)
Overview
Accounting fundamentals are basic in the corporate world. Considering the accounting equation
shows the relationship between three elements of balance sheet assets, liabilities, and capital.
This course aims to learn how to do fundamental accounting using equation. This course first
covers the accounting principles and its concept. The second topic covers the various accounting
components with its description. The third topic involves the accounting equation that shows the
relationship between the three elements. Some sample examples of the accounting equation are
also given for a better understanding. How the transactions recorded in the double-entry system
and its impact accordingly. The various steps involved in accounting are also considered in this
course. The main aim of this topic is to understand basic accounting to form a base for accounts.
The further expansion of knowledge in accounting can be possible with this basic understanding.
Similarly, basic accounting with expanded accounting reflects the relationship between
accounting components. The difference between both the accounting equation is highlighted. In
this accounting equation, the capital is classified into several elements, contribution, drawings,
income, and expenses. The proportion of capital increases due to contribution and income,
whereas drawing and expenses decrease the proportion of capital. In fundamental accounting, we
will learn about the equations and test the knowledge using a quiz after every two to three topics.
Introduction

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Course Topics (Fundamental accounting and equation)
The purpose in preparation of financial statements is to follow the generally accepted accounting
principles (GAAP). This principle is based on fundamental accounting and concepts. The
advanced accounting terms start from fundamental accounting. The objectives of financial
accounting are to help the small business owner to large business holders. These fundamentals
help to understand the equation that determines all business failure and success.
The basic accounting principles are highlighted as going concern concept, accrual concept, entity
concept, periodicity concept, and the last monetary unit concept. This accounting assumption
provides the guidelines in preparation, presentation, and interpretation of financial statements.
Going concern refers to the consistency in business, the operation of the company can continue
for an indefinite period. The accrual concept is recognized as the income earned not the income
collected. The entity concept treated the business as one accounting entity. This entity is a
separate legal entity in the eyes of law. Periodicity concept shows the period of business that is
divided into its subtypes. In preparation of the various financial statement, the periodicity
concept usually has equal length of the period. The last that is the monetary unit concept study
the transaction in terms of currency.
The elements of accounting include three elements namely assets, liabilities and capital. Assets
are the owned resources of the company. They can be classified into two different parts that are
current assets and non-current assets. Liabilities mean the obligation to the company to pay off
the creditors and lenders. This is also classified into two parts namely current liabilities and non-
current liabilities. Capital means the interest of the owner in the company's performance by
deducting liabilities from the assets. In the accounting equation, when the transaction takes place
the changes cause, only to stay the equation in balance. This happens because the changes occur
in two aspects the account recorded in the financial statement

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Course Topics (Fundamental accounting and equation)
Principles of fundamental accounting:
A) Preparation of financial statement
B) Presentation of financial statement
C) Interpretation of financial statement
There are different assumptions in accounting concepts such as going concern, accrual system,
entity concept, and monetary unit.
Going concern
Going concern reflects the consistency of business over a long period. This concept is also
known as continuity, the business will continue financial statement assumption according to
going concern assumption the balance sheet items are recorded at its cost, not at fair market
value. Long term assets are fully used and replaced in the books of accounts. Going concern
means the continuity in business for an indefinite time, where financial statements are made
keeping in mind that business will continuously exist in the future.
Accrual basis
This method records the values of income when they are earned not when they are incurred. The
collection of cash doesn't imply income and expenses are also different from the payment of
cash.

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Course Topics (Fundamental accounting and equation)
In September 2018 a company rendered some services to nelson and nelson paid for services in
November 2018. The income is even the income has not earned.
Separate entity
The separate entity concept refers to the sole proprietor can be differentiated in between business
assets and owned assets. For example, the proprietor owns a piece of machinery for the business,
this will imply that the transaction takes place and if the proprietor takes a payment of salary, this
will imply as drawings from the business.
Periodic concept
The indefinite life, the periodic concept follows two periods:
A calendar year means a period of 12 months from January 1st to December 31st and the fiscal
year starts from 1st of April to 31st of March.
Monetary unit
The monetary units have classified into two types- based on quantity and stable state of money.
Quantity recorded the amount in terms of money. In financial statements this terms of money
stated country wise currency.

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Course Topics (Fundamental accounting and equation)
The stable state of a currency refers to the purchasing power of the company. The condition of
inflation can be avoided. If any of the financial statements reported inflation with the accounting
standards the rate must be restated.
Matching Principle
The matching concept refers to the company's reporting where an expense incurred in the period
in which associated income earned. After that, the treatment entered in the balance sheet results
in liability. This is interlinked with accrual basis principles and adjustments.
Revenue Recognition-
In this accounting, based on the accrual concept, income is recorded at cost rather at fair market
value; this concept follows the same income recorded in the financial statement performed when
the sale takes place. In case though the amount is not yet collected.
Expense Recognition-
Expenses recognition: based on the accrual concept, expenses are also recorded incurred at cost
rather at fair market value; this concept follows the same the expenses paid as recorded in the
financial statement.
Historical cost
The items shown in the balance sheet are usually recorded at historical cost. Whereas various
items shown in the financial statements are recorded at market value, current cost and discounted
amount.

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Course Topics (Fundamental accounting and equation)
Quiz:
1) What is the calendar year?
 The period from 1st January to 31st December
 The period from 1st April to 31st March
 The period starts from any of the months
 None of the above
2) What is the fiscal year?
 The period from 1st January to 31st December
 The period from 1st April to 31st March
 The period starts from any of the months
 None of the above
3) What are the two features of the monetary unit assumption?
 Quantity and stable state
 Stable and dependable
 Both (A) and (B)
 All of the above
4) Which item shown in balance sheet asset side
 Prepaid expenses
 Prepaid insurance
 Both (A) and (B)
 None of the above

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Course Topics (Fundamental accounting and equation)
5) Which account is a current asset account?
 Bills payable
 Closing stock
 Building
 Any of these
Account
There are several transactions takes place every day in business entities. All the transaction from
purchasers to suppliers should be performed and recorded. An account is a record of assets,
liabilities, income, and expenses. The three main components of accounting are assets, liabilities,
and capital.
Assets
Assets are those resources that are owned and controlled to provide future benefits, this resource
represents economic value. This is the owned resources of the company used in business. These
assets can be classified as current assets or non-current assets.
Current assets
Current assets are those assets that can be within one year. The examples of current assets are
cash and cash equivalents, marketable securities, prepaid expenses, inventories. These assets are
short term assets, the main element of a company's working capital.

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Course Topics (Fundamental accounting and equation)
Current assets- cash and cash equivalent + accounts receivable+ inventories+ marketable
securities+ prepaid expenses other liquid assets.
Cash and ash equivalent- this includes bills, funds, coins, cash in bank cash at hand, etc.
Receivables- accounts receivable, bills receivable, rent receivable, and others.
Inventories- assets held for trading in the daily business.
Prepaid expenses- expenses that are paid in advance they are known as prepaid expenses.
Non-current assets
Non-current assets are those assets that are not expected to be consumed within one year. Non-
current assets are as follows: investments, land and building, intangible assets, other assets.
Liabilities
Liabilities are the company's obligations or payables of the business, the company’s assets that
are as follows: the amount borrowed from the creditors and lenders. The contribution made by
the shareholders and the capital introduced in the business. They are also categorizing in current
and non-current liabilities.
Current liabilities
Current liabilities mean those liabilities having an obligation and due within twelve months.
Examples of current liabilities are:

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Course Topics (Fundamental accounting and equation)
Trade payables- bills payable, account payable, rent payable, interest payable, accrued expenses,
notes payable etc.
Provisions- the short term liabilities are projected and can be reliably measured.
Short term borrowings- loans, credit available for a short period.
Tax liabilities- tax involves shortly paid taxes.
Non-current liabilities
Those liabilities that are not currently payable and
Examples of non-current liabilities are:
Long term liabilities, bonds, mortgage, deferred tax payables.
Capital
Capital is also known as equity capital, the amount remained after all liabilities pay off. Capital =
total assets – total liabilities.
The comparison in the owner's contribution expresses as the capital increases, drawings, and the
expenses decreased it. Ownership is the reason that the proportion takes place in the capital. The
sole proprietorship capital includes owner equity. In partnership, capital includes the partner’s
equity and in the corporations, it includes stockholders equity.
With the three elements the two items also important in accounting.
Income

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Course Topics (Fundamental accounting and equation)
Income also reflects the proportion I liabilities and assets, increase and decrease in assets and
liabilities. Revenues are the amount represented by the ordinary course of business.
Expenses
This item implies the proportion that is increase and decrease in liabilities and assets resulted in a
decrease in equity excluding owners' distribution. Expenses include daily expenses that take
place in business, sales, advertising, rent, salaries, income tax, and repairs. The net income of
business expresses as all income minus all expenses.
Accounting Equation
The accounting equation followed double-entry accounting. All the transaction recorded in the
journals has two effects that are debit and credit. This equation helps in the preparation of the
Balance sheet. Debit recognized as the left side and credit as the right side. When the transaction
takes place the changes cause in the accounting equation, only to stay the equation in balance.
This happens because the changes occur in two aspects the account recorded in the financial
statement. The changes on the left side similarly change the right side of accounts.
Accounting equation derived mathematically to express the relationship between assets,
liabilities, and capital. When the business starts, the assets are contributed by owners and
acquired from the lenders or creditors. All the transaction has different aspects.
All transaction in accounting has a matching concept; there are two effects of the recorded
transaction.

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Course Topics (Fundamental accounting and equation)
Assets= liabilities + shareholders equity
Assets= liabilities + capital
Examples using accounting equation are
1. Maxwell put its property $ 60,000 to start a grocery business. He bought the stock of
commodities and paid $ 2,000. His company takes a loan of $ 70,000 from a bank.
Transaction Asset Liabilities Capital
Investment in business 60,000 = - + 60,000
Each transaction has two aspects. This transaction shows that assets are increased and at the
same time cash also increases. Capital introduced in business increased. Thus the capital is
increased because of the owner's contribution and income, while decreased by drawings. Hence,
no liability affected.
2.
Transaction Asset Liabilities Capital
Investment in business 60,000 = - + 60,000

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Course Topics (Fundamental accounting and equation)
Loan from bank 70,000 = 70,000 + -
His company received cash, the total assets increased in its value. He has an obligation for the
liabilities to pay back the bank. Therefore, an increase in liabilities occurred.
3.
Transaction Asset Liabilities Capital
Investment in business 60,000 = - + 60,000
Loan from bank 70,000 = 70,000 + -
Purchased
commodities
2,000 = + -
His company obtained stock of commodities results in an asset to increase. The payment for
those purchased commodities done. This also results in the decreased asset. This transaction
shows that an increase in one of the assets resulting in a decrease in another asset.

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Course Topics (Fundamental accounting and equation)
Expanded Accounting Equation
The above transaction result that liabilities and the company’s capital not affected. The
accounting equation is equal even in this case. The assets balance is equal to liabilities and
capital balance.
The accounting equation shows the relationship with the accounting components, in this
accounting equation the capital component is split into four other, the contribution, drawings,
income, and expenses. Capital is affected due to this contribution, drawing, income, and
expenses. The two components contribution and income increase the capital, whereas the
drawing and the expenses decrease the capital. The sole owner accounting equation framed in
such a way,
Assets= liabilities+ capital – drawings – expenses.
The contribution in the form of investment is recorded in the capital and the contribution added
to again in the capital. The owner's contribution and additional contribution also recorded into
capital.
1. Maxwell put its property $ 60,000 to start a grocery business.
2. He bought the stock of commodities and paid $ 2,000.
3. His company takes a loan of $ 70,000 from a bank.
4. Services rendered and $ 1,000 receive as cash.
5. Again he provided the services is of $ 700
6. He bought some commodities of $ 850

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Course Topics (Fundamental accounting and equation)
7. The expenses incurred for floor repairing $ 400, paid within 45 days
8. He withdraws some cash of $ 10,000 for his personal use.
9. He paid some amount of loans taken earlier.
10. He received $700 from one of his customers as in given transaction number five.
The given effect of the expanded accounting equation is as follows:
Assets = Liabilities + Capital _ Drawings + Income _ Expenses
1 60,000 = + 60,000 _ + _
2 70,000 = 70,000 + _ + _
3 2,000
(2,000)
= + _ + _

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Course Topics (Fundamental accounting and equation)
4 1,000 = + _ + 1,000 _
5 700 = + _ + 7,00 _
6 850 = 850 + _ + _
7 = 400 + _ + _ 400
8 (10,000) = + _ 10,000 + _
9 12,000 = (12,000) + _ + _
10. 700
(700)
= + _ + _
Bal . 1,10,550 = 59,250 + 60,000 _ 10,000 + 1700 _ 400

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Course Topics (Fundamental accounting and equation)
Double-entry system
The evolution of the double-entry accounting system emerged as a result of the industrial revolution. In prior
time, merchants recorded the business transaction in the simple form on a sheet of paper in books known as
the single entry system method. As the business emerged from complex phases leads to development. The
effective record needed to enter the accounting transaction. Luca Pacioli was the contributor to the double-
entry system of accounting, the Father of Modern Accounting. The double-entry bookkeeping system has two
aspects of accounting. For example- a company borrows a loan from the bank, the cash is increased and the
account payable is also increased.

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Course Topics (Fundamental accounting and equation)
Single Entry Bookkeeping
As the name suggests this system does not record the transaction in two aspects. Separate books of account are
maintained for this transaction like cash, receivables, and payables. That's why the accounting treatment remains
incomplete.
The given example stated that on September 5, 2018, the company invested $ 40,000 to start an education
consultancy business. As on date September 10, 2018, the company bought a laptop for the official work of $
5000. Further on date September 11, the company rendered its education services and received $ 1000.
Date Particulars Amount Balance
01/09/2018 Balance c/d $
05/09/2018 Owners investment $ 40,000 40,000
10/09/2018 Purchases of laptop (5,000) 35,000
11/09/2018 Cash from services rendered 1,000 36,000
Double-entry accounting system
The given rule is when an asset increased, the transaction is debited and when the liabilities increased the
transaction is credited. Whereas the asset decreased, the transaction is credited and when the liabilities decreased
the transaction is debited. This application is the same applied to capital also. Debit the expenses and credit the

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Course Topics (Fundamental accounting and equation)
income. A journal entries format included the date of transaction, account wise classification as debit and credit
side and narration to describe.
The double entry system during olden times the merchants recorded the transaction using a single list.
As time passes the complexity of business increased however the advanced system of accounting came.
Double-entry bookkeeping recorded the transaction in two aspects.
Accounting Increase Decrease
Asset Debit Credit
Liability Credit Debit
Investment Credit Debit
Drawing Debit Credit
Income Credit Debit
Expenses Debit Credit
The transaction discussed below using the journal entries.

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Course Topics (Fundamental accounting and equation)
Date
2018
Particulars Debit amount Credit amount
5 Cash 40,000
Capital (Nelson) 40,000
(The capital introduced in business)
10 Business purchases(Laptop) 5,000
Cash 5,000
(Business purchases of $2,000)
11 Cash 1,000
Income from services 1,000
(Cash received from the customer)
Every transaction above has two aspects. The transaction recorded in two accounts. These are the journal entries
of the above-discussed example. Nelson is the businessman who invested $ 40,000 to start a business of
providing education services in September 2018
1. The first task is to mention the date of the respective transaction takes place on the left side of a given
table.
2. Identify the account whose account is going to debit and accordingly put the amount. The cash increased
because the contribution takes place. To increase the cash account, an asset the debit treatment required.

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Course Topics (Fundamental accounting and equation)
The cash recorded and the amount of $ 40,000 placed on the column.
3. The next step is to identify which account is going to credit and accordingly put the amount. Contribution
increases the capital so the treatment of credit would place on capital account. Capital (Nelson) on the
credit column the amount placed for capital account. The credit amount is always recorded after the debit
entry. The below treatment shows the credit side.
4. The narration explains the journal entry passed.
The treatment of journal entries done by many separate book holders of the business. This is the most
important treatment to control the accounting system. The journal entries passed by the double-entry
bookkeeping system with stepwise according to the accounting cycle.
Accounting process
The introduction of the accounting process is first to identify and analyze the transaction. Not every transaction
needs to be entered into this system.
For example, the loan made by the company's owner that does not link to business entities loans. The
transactions are identified and reflect the knowledge of how the business affected and then the amount recorded.
The preparation of a business account serves a basis to record a transaction.
Journals recording
The journals are recorded manually or electronically. This transaction recorded contains a minimum of two
accounts. To simplify the process these journals are often used in the transaction recording and they record
frequently such as sales, cash receipts, etc. this is the general recording takes place not the special book
treatment. Transactions that are recorded are in chronological order. These journals are also called as books of

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Course Topics (Fundamental accounting and equation)
original entry.
Ledger posting
After the journal entry system the recorded journal posts in the ledger account. This process is also known as
books of final entry. The ledger shows the changes in each account according to its past transactions. All the
transactions posted in the ledger can now be evaluated. The debit and credit of all the account made to cash
transferred in cash accounts. And then the owner can calculate the proportion in assets and liabilities about cash
that is increased or decreased.
Accounting process
 Identification and analysis of business transactions- this is the first step in the accounting cycle to identify
the accounts and analyze the transaction and events. Each account doesn't follow the same treatment in
the accounting cycle. Those who belong to business are involved in these steps.
 Recording the transaction in journal entry account- journal entries can be recorded in two ways namely
manually and electronically. This transaction is recorded in journal entries in double-entry bookkeeping
This transaction affects two journal accounts. Many transactions repeated often such as sales, purchases,
cash, receipts, and payments. Though a journal entry passed to record that transaction and not in any
special book.
 Posing entries to the ledger- this is the final entry, the ledger shows the past transaction with the present
amount where the collection of accounts entered. After posting the ledger transactions, the balances of
each account can be determined
 Trial balance - the trial balance prepared to test the debits and credits balances equally. After the ledger
treatment, the trial balance prepared. All the debit balances add back in the trial balance and also the

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Course Topics (Fundamental accounting and equation)
credit balances. The debut side is equal to the credit side.
 Preparation of entered adjustment- the adjustment of entries is necessary. This is applying based on the
accrual principle of accounting. Sometimes in business, the transaction may have been incurred but the
journal not recorded. Sometimes the income may have been generated but the collection not entered in
books of accounts. There are the adjustment entries that update the account as this is the summarized
account in the financial statements.
 Financial statements- the equality of debit and credit, the updated accounts have been verified, the step is
to prepare the financial statements. The financial statement is the last step of the accounting cycle in
maintaining accounts. the set of the financial statement is consist of :
Income statement
Equity (changes) statement
Balance sheet statement
Cash flows statement
Notes to financial statements.
 Post-closing trial balance- the nominal accounts, statement of income accounts are closed for the
preparation of further accounting p[periods. These nominal accounts include income, expenses, and
drawing accounts. These are the accounts measured period wise. The summary of accounts the income
statement, after closed the entries and proper capital account made. The real and personal accounts shown
in the balance sheet.
Conclusion

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Course Topics (Fundamental accounting and equation)
Here in this course, all the elements are covered. The accounting equation discussed above shows the relationship
between assets and liabilities in its basic form and also in its expanded form. The two aspects involved in each
example of the accounting equation. This is the impact of two accounts in the financial statement that takes place.
The change in one side of the account directly linked to the change on the other side of the accounting equation.
The balance of accounting is done with such. This equation helps in understanding accounting principles in
accounting problems. In both the cases in the accounting equation, in its usual form or expanded form, the left
side and right side relationship show the balance. Considering this equation the problems solving the task for
more problems solved.
Final quiz
1) Which account is a non-current asset account?
 Cash in bank
 cash in hand
 land and building
 account receivable
2) What type of account is Accrued rent payable account?
 current assets
 noncurrent asset
 Both (A) and (B)
 None of the above
3) The double-entry bookkeeping system posting with
 Two accounts
 Three accounts

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Course Topics (Fundamental accounting and equation)
 Four accounts
 All of the above
4) The balances of all the accounts listed under
 Trial balance
 Balance sheet
 Income statement
 Any of these
5) The accounting equation formulated
 Assets= liabilities + capital
 Assets= liabilities + equity
 Both (A) and (B)
 Assets= liabilities + retained earnings
 All of the above
6) Balance sheet shows which of the particulars?
 Receipts and payments
 Assets and liabilities
 Income and expenses
 Any of the above
7) Land and building are shown on which side in financial statement
 Asset
 Liabilities
 Income
 Expenses

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Course Topics (Fundamental accounting and equation)
8) The balance sheet can be classified among assets and liabilities based on
 Long term assets
 Current assets
 Non-current assets
 Fixed assets
 All of the above
9) Which cost helps in the balance sheet presentation?
 Historical cost
 Future cost
 Both (A) and (B)
 Any of the above
10) The profit is shown as
 Income – Expenses
 Receipt – Payment
 Inflow- Outflow
 Revenue - Expenditure
References
Swieringa, R. J. (2016). Memorial: Robert T. Sprouse and Fundamental Concepts of Financial
Accounting. Memorial Articles for 20th Century American Accounting Leaders, 378.

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Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.
Turtle, H. J., & Wang, K. (2017). The value in fundamental accounting information. Journal of Financial
Research, 40(1), 113-140.
Juárez, F. (2016, August). The accounting equation and claims on assets value change. In 2016 Third
International Conference on Mathematics and Computers in Sciences and Industry (MCSI) (pp. 246-251). IEEE.
Smith, M. (2018). Luca Pacioli: The father of accounting. Available at SSRN 2320658.
Juárez, F. E. R. N. A. N. D. O. (2016). The Dual Aspects of Accounting Transaction and the Assets Claims on
Assets Equality in Axiomatic Theory. International Journal of Mathematical and Computational Methods, 1,
128-134.
Sitdikova, L. B., Starodumova, S. J., & Volkova, M. A. (2018). Aspects of Transactions by Business Entities in
Civil Legislation. European Research Studies Journal, 21(4), 557-566.
Sahadeo, C. (2018). Basic Financial Accounting. Financial Literacy and Money Script (pp. 207-229). Palgrave
Macmillan, Cham.
John, G., Viswanathan, M., & Ghosh, M. (2019). A transaction cost approach to channel design with application
to multi channels settings. In Handbook of Research on Distribution Channels. Edward Elgar Publishing
. Manei, B. O., & Omagwa, J. (2019). Accounting Practices and Financial Performance of Public Secondary
Schools in Makueni County, Kenya.

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