Understanding Charges, Payments, and Financial Statements
Theory of Charge and Payment
It concerns the effect of trading assets without changing the accounting equation. Each transaction affects the balance and changes in equity values, without impairing the equality of the equation. In each of these transactions, at least two accounts are affected.
Understanding ‘Debit’ and ‘Credit’
- Debit (Should): Column in the Account Book that signifies payments charged to the owner. It is the left side of the T-account.
- The remaining balance is the account value recorded at a given date after subtracting the sum of either debit or credit movements.
Revenue and Expenses
- Sales are income.
- Revenues are recorded as credit.
- Losses are expenses.
- Debit should be called: charge.
Financial Statements
Financial Statements are documents that provide periodic reports, at specific dates, on the status or development of a company’s management. They provide the information needed for decision-making in an enterprise.
Types of Financial Statements
Projected Financial Statements
Statements prepared for a future date or period. Calculations are based on estimates of transactions that have not yet been made. It is an estimated statement, often accompanied by a budget; a proforma statement.
Audited Financial Statements
These statements have gone through a process of review and verification. This audit is performed by independent public accountants who express an opinion on the reasonableness of the financial position, results of operations, and cash flow presented in the company’s financial statements for a particular period.
Consolidated Financial Statements
These are published by legally independent companies but show the financial position and profit as if the operations of the companies were a single legal entity.
Classes of Financial Statements
- General Balance Sheet
- Income Statement (or Operating Statement)
- Cash Flow Statement
- Others
General Balance Sheet
An accounting document that reflects a company’s assets at a specific time. It has two parts: assets and liabilities. The asset section shows the company’s assets, while the liabilities section details its financial obligations. Legislation requires that this document accurately reflects the state of the company’s assets.
Comparative Balance Sheet
A financial statement that compares the various elements that compose it for one or more periods to show the changes in a company’s financial position and facilitate analysis.
Consolidated Balance Sheet
This statement shows the financial position and results of operations of an entity composed of the holding company and its subsidiaries as if they constitute a single economic unit.
It is formulated by replacing the holding company’s investment in shares of subsidiary companies with their assets and liabilities, eliminating the balances and transactions between different companies, and unrealized gains within the entity.
Other Financial Statements
Estimated Balance Sheet
A financial statement prepared with preliminary data, which is usually subject to correction.
Proforma Balance Sheet
An accounting statement showing tentative amounts, prepared to display a proposal or a probable future financial situation.