Elements and components of a complete set of financial statements

Financial statements are often described as the language of business. These statements tell the condition and performance of a business historically, currently and prospectively. They are the tongues of businesses that communicate with their users and readers.

Financial statements are the formal end product or main output of a business’ financial accounting process. These are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users.

General purpose financial statements are those intended to serve users who do not have the authority to demand financial reports tailored for their own needs. The objective of general purpose financial statements is to Read more

Understanding income and the difference between a revenue and a gain

What is income?

Income is defined as “increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution from equity participants”.

Simply stated, income is an inflow of future economic benefit that increases equity, other than those that are contributed by owners. It specifically increases retained earnings in the equity section of the balance sheet.

Income is derived from the following activities: Read more

What is the difference between a cost and an expense?

So what’s indeed the difference between the two income statement accounts? Before we try to answer that question, we will first try to discover why this question existed anyway? Actually, we try to differentiate two things when they seem to be they same and we can’t figure out their differences. So what are their similarities? Cost and expense both sounds unfavorable elements of income statement since they both cause a decrease to net profit. In the accounting equation, the two are also naturally debit accounts (meaning they increase when debited and decrease when credited). Cost and expenses also cause an outlay in cash or an increase in liability when obtained. For example, a purchase of equipment causes cash outlay when purchased on cash payment and causes an increase in liability when purchased on account. The following is a list of some similarities between a cost and an expense. Read more

Different forms of business and company ownership

1. Sole Proprietorship

Single proprietorship is the simplest form of organization in most of the countries in the world. Unlike other forms of entity, it is usually not governed by special laws. A proprietorship is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. The single proprietor has unlimited liability since creditors of his business may proceed not only against the assets and properties of his business but also after his own personal assets and properties. A sole proprietorship essentially refers to a natural person or individual doing business in his or her own name and in which there is only one owner and no partners. Read more

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