FINANCIAL STATEMENTS BY ABDULLATIF ESSAJEEFORMS OF BUSINESS ORGANIZATION e@ A business is any economic unit where goods and services are exchanged for one another or for money with a view of profit. e Every business requires some form of investment and enough customers to whom its output can be sold on a consistent basis in order to make a profit. e@ A business is often called a profit oriented organisationFORMS OF BUSINESS ORGANIZATION e@ There are three forms of business organizations: — Sole proprietorship — Partnership — CompanySole Proprietorship @ Unincorporated business owned SOLE PROPRIETORSHIP by one person @ No special legal requirements must be met to start asole proprietorship @ Usually small in size and common in the service, retailing and farming industry @ Often the owner is the managerSole Proprietorship... @ Legally the business and the owner are considered to be one and not separate entities. For this reason, the proprietor has unlimited liability as far as the proprietorship is concerned. @ Tax authorities do not separate between the proprietor and the proprietorship. The tax liability of the business falls on the proprietor. e Accountants, however, view sole proprietorships as separate entities from the owners that must be accounted for separately from the ownerPartnership e Anunincorporated business owned by two or more persons known as partners e Legally, a partnership is considered not separate from its owners. @ Tax authorities like in the case of a proprietorship, do not distinguish between the partners and the partnershipPartnership... @ Consequently, any tax liability that shall arise from the partnership is considered to be the personal responsibility of the individual partner @ Each partner in a general partnership has unlimited liability @ For accounting purposes, however, a partnership is assumed to be a separate entity distinct from its owners.Company e Is an incorporated business legally separate fromits owners. e It is alegal person capable of engaging in economic activities; entering into contracts, owning property, disposing property, suing and being sued etc @ The owners are called shareholders @ Ownership is represented by shares of capitalCompany... e@ The shareholders enjoy limited liability e@ A company is taxed onits net income. e Any distribution of the company’s earnings to shareholders (Dividends) is also taxed as part of the personal income of the shareholdersActivities Performed by Business Organisations Activities Service provision Any of these activities can be performed by any of the three forms of business organisations.The end result (output) of the accounting process? @ the preparation of financial statements and reports that serve as communication tools.Financial Statements and Reports Allbusiness entities produce financial statements and reports to provide information about -their performance, financial position and -financial adaptability to users both inside and outside the business to assist them in making decisions.Financial statements A complete set of financial statements comprises: @ astatement of comprehensive income @ astatement of changes in equity @ astatement of financial position © astatement of cash flows @ notes to the financial statements; comprising of material accounting policy information and other explanatory notes.STATEMENT OF PROFIT & LOSS AND OTHER COMPREHENSIVE INCOME e Statement of Profit or Loss and Other Comprehensive Income is made up of — Statement of Profit or Loss — Statement of Other Comprehensive IncomeSTATEMENT OF PROFIT OR LOSS © provides information about performance of an entity for a given period of time (reporting period) @ it includes all items of revenues, expenses, gains and losses recognized in a period.STATEMENT OF PROFIT OR LOSS @ In the statement of income, revenues earned are compared with the expenses incurred to generate the revenue. Where, Z © @ Revenues earned > expenses incurred =P. - @ Revenues earned < expenses incurred = LossRevenues @ Income (inflow of economic resources or decrease in liabilities) arising from the ordinary day to day activities of an entity, normally from the sale of goods, or the rendering of services.Expenses @ Decreases in assets or incurrences of liabilities, resulting from the ordinary revenue-earning activities of an entity.Increases in equity from something other than the day to day activities of the enterprise and are not associated with capital investments or withdrawals An economic benefit outside the normal day to day operations of a businessLosses e Decreases in equity that is outside the normal day to day operations of the business and are not associated with capital investment or withdrawal @ An economic loss outside the normal day to day operations of a businessSTATEMENT OF PROFIT OR LOSS ILLUSTRATED SOFTBYTE ENTERPRISE Statement of Profit or Loss For the period ended 31° March 2023 KSh. Reverues Service reverue 4,700,000 Expenses Sdlaries expense (900,000) Rent expense (700,000) Supplies expense (500,000) Advertising expense (250,000) Utilities expense (200,000) Total expenses, (2,550,000) Profit for the period 2.150.000STATEMENT OF CHANGES IN EQUITY @ Serves as a connection between the statement of income and the statement of financial position @ It explains the changes that have taken place in owners’ equity during the period covered.@ Owners claims against assets of an entity e Assets = Equity + Liabilities e Equity = Assets - LiabilitiesSOFTBYTE ENTERPRISE Statement of Changes in Equity For the period ended 31° March 2023 Ksh. Asat April 2022 10,500,000 Additional capital 5,000,000 Profit for the period 2,150,000 Drawings (1,000,000) As at 31° March 2023 16,650,000The Statement of Financial Position @ astatement that reports (reflects) the financial position (health) of an entity at a given point in time. @ The financial position of an entity is reflected by the amounts of: — assets, — liabilities, and — owners’ equity of the entity.Statement of financial position is a detailed expression of the accounting equation.THE ACCOUNTING EQUATION Assets= Equity + Liabilitiese Anitem from which it is probable that future economic benefits will flow to the enterprise @ Some assets may have a physical substance while some exist not in physical or tangible form but as intangibles@ Classification for the statement of financial position purposes purposes: —Non-current assets —Current assetsLiabilities @ Obligations or debts of an enterprise @ Classification for the statement of financial position purposes: —Non-current liabilities —Current liabilities@ Owners’ claim against the assets of an enterprise Remember @ ASSETS = EQUITY + LIABILITIES Therefore @ Equity= Assets — liabilities @ Assets — Liabilities = Net assets @ Equity = Net assets@ The term used for equity depends on the form of business: Sole proprietorship Partnership Partners’ Capital Company Shareholders’ equityThe statement of financial position illustrated SOFTBYTE ENTERPRISE Statement of Financial Position As at 31 March 2023 Ksh. Assets Non —current assets Land 3,000,000 Building 3,000,000 Equipment 1,000,000 7,000,000 Current assets Supplies inventory 1,200,000 Accounts receivable 1,400,000The statement of financial position illustrated Cash 8,050,000 10,650,000 Total assets 12,650,000 Equity and Liabilities Capital and reserves: Capital 16,650,000The statement of financial position illustrated... Non-Current liabilities Long termloan 400,000 Current liabilities Accounts Payable 600,000 Total equity andliabilities 17,650,000Elements of the financial statementsElements of Financial statements @ Items to be included in financial statements. @ These are — Assets Liabilities — Equity — Revenue — Expenses — Gains and — LossesElements... Itis useful to think of the elements as two distinct groups. @ The first group of three elements-assets, liabilities, and equity-describe amounts of resources and claims to resources at a moment in time and appear in a statement of financial position. @ The other four elements (revenues, expenses, gains and losses) describe ‘transactions, events and circumstances that affect an enterprise during a period of time and are presented in a separate income statement. @ The first group of elements is affected by changes in the second group of elements