Accrual concept:

●Income and expenses are recorded in the I.S. as they are earned / incurred regardles s of whether cash has been received/ paid.

(Sales revenue: income from goods sold in the year, regardless of whether those good s have been paid for.)

☆Relationship between a statement of financial position and a statement of income

●The balance sheets are not isolated statements, they are linked over time with the in come statement

●As the business records a profit in the income statement, that profit is added to the capital section of the balance sheet, along with any capital introduced. Cash taken out of the business by the proprietor, called drawings, is deducted. Illustration – the accounting equation:

The transactions:

Day 1 Avon commences business introduction $1,000 cash.

Day 2 Buys a motor car for $400 cash.

Day 3 Buys inventory for $200 cash.

Day 4 Sells all the goods bought on Day 3 for $300 cash.

Day 5 Buys inventory for $400 on credit.

SFP at the end of each day’s transactions:

Solution:

Day 1 Assets (Cash $1,000) = Capital ($1,000) + Liabilities ($0)

Day 2 Assets (Motor $400) = Capital ($1,000) + Liabilities ($0)

(Cash $600)

Day 3 Assets ( Inventory $200) = Capital($1,000) + Liabilities ($0)

(Motor $400)

(Cash $400)

Day 4 Assets ( Motor$ 400) = Capital + Liabilities ($0)

(Cash $700) (Beginning$1,000)

(Profit $100)

Day 5 Assets (Inventory $ 400) = Capital + Liabilities

( Motor$ 400) (Beginning$1,000)($400)

(Cash $700) (Profit $100)

Avon Statement of Financial Position as at end of Day 5