Question

Discuss in your own words the following topics:

The four financial statements to include the time frame they are each for, how they are connected to each other and the preferred order of preparation.

The accounting equation, broken down to its finest accounts and its importance.

What are debits and credits and what are the normal balance of each of the major accounts (eg assets)

Answer 1

a) Preferred order of preparation of financial statements should start from former year first.

Step 1: Prepare income statement

Step 2: Prepare Statement of change in equity

Step 3: Prepare Balance Sheet

Step 4: Cash flow statement

Balance sheet items and cash flows are linked with each year. Balances of Balance sheet items is carry forward to next year and all movements happen in cash flows and income statement is added to the carry forward items of balance sheet.

b) the accounting equation is the foundation of double entry accounting, a system where every financial transaction is entered into two places in the business’s books—as a debit and as a credit.

The accounting equation is this:

Assets = Liabilities + Owner’s (or Stockholders’) Equity

• Assets are everything your business owns. Examples of assets include tangible assets, such as cash, receivables, inventory, equipment, vehicles, and real estate, and intangible assets such as intellectual property (patents, copyrights, and trademarks).
• Liabilities are payments your company has to make. Examples of liabilities include loan payments, lease payments, payments on lines of credit or credit cards, and other payables. There are two types of liabilities: short-term or current liabilities are due within 12 months, and long-term liabilities are due to be paid off more than 12 months after the current date.
• Owner’s Equity or Stockholders’ Equity refers to how much of the business belongs to you (or, if your business issues stock, to the stockholders). It’s also expressed as assets minus liabilities, and is not to be confused with the value of the business.

c) All assets and expenses are debit and all liabilities, income and common stock are credit as shown in below table

Income Statement
Particulars	Dr./Cr.	2015	2016	2017	2018
Sales	Credit
Sales return	Debit
Cost of goods sold	Debit
Gross Profit
Salary expense	Debit
Administrative expense	Debit
Selling expense	Debit
Depreciation	Debit
Earnings before other income, interest and tax
Other income	Credit
Earnings before interest and tax
Interest expense	Debit
Earnings before tax
Taxes	Debit
Earnings after tax
Dividend	Debit
T/f to retained earnings
Balance Sheet
Assets	2015	2016	2017	2018	Liabilties	2015	2016	2017	2018
Current Assets 5-02.1: Cash and cash items 5-02.2: Marketable securities 5-02.3: Accounts and notes receivable 5-02.4: Allowances for doubtful accounts and notes receivable 5-02.5: Unearned income 5-02.6: Inventories 5-02.7: Prepaid expenses 5-02.8: Other current assets 5-02.9: Total current assets					Current liabilities 5-02.19: Accounts and notes payable 5-02.20: Other current liabilities 5-02.21: Total current liabilities
Noncurrent assets 5-02.12: Other investments 5-02.13: Property, plant and equipment 5-02.14: Accumulated depreciation 5-02.15: Intangible assets 5-02.16: Amortization of intangible assets 5-02.17: Other assets 5-02.18: Total assets					Noncurrent liabilities 5-02.22: Bonds, mortgages and other long-term debt 5-02.24: Other liabilities 5-02.25: Commitments and contingent liabilities
					Stockholders' equity 5-02.27: Redeemable preferred stocks 5-02.28: Non-redeemable preferred stocks 5-02.29: Common stocks 5-02.30: Other stockholders' equity 5-02.31: Noncontrolling interests 5-02.32: Total liabilities and equity