Swinburne Online SWIN BUR . NE . Week 2 - Business transactions What are the key financial accounting reports? In general, companies are required to prepare 3 types of financial statements (which are sometimes also called financial reports): · Balance Sheet (also called the statement of financial position), reports on the assets, liabilities and equity of an entity at a particular point in time . Statement of Profit or Loss, reports on the income and expenses of an entity for a period and the resulting profit or loss. Profit is the excess of income over expenses for a period. · Statement of Cash Flows, reports on an entity's cash inflows and cash outflows for a specified period, which are further classified into operating, investing and financing activities. These financial statements provide external stakeholders with a complete picture as to how the company fared financially during the year, and where it stands at year end. We will cover each one of these in turn over the next few weeks. To someone with accounting knowledge, the financial statements will talk to them, and tell a story about the company. They will be able to get a sense of the company's successes, pressures and concerns that it had to carefully navigate and evolving trends that might set the trajectory for the future. What are business transactions and why do they need to be recorded? Business transactions involve exchanges of resource between the entity (company) and another entity (company or individual) that affects the assets, liabilities and equity in the company Business transactions need to be recorded when: · It involves an exchange of resources between one business and another business or person (some exchange has taken place), · The exchange can be reliably measured in monetary terms (you are able to put a dollar value to the transaction), and · The exchange occurs at arms' length distance (fair exchange, with both sides equally able to try to maximise value from the transaction) Note that there are business events which are not recorded, as they do not satisfy the criteria for a business transaction (see above). Business events are occurrences that have the potential to affect the entity (business) in some way, but will not be recorded as a business transaction until an exchange of goods occurs. For example, if the business negotiates a sale with another business, but no exchange has taken place, then the negotiation is simply a business event which is not recorded. Note also that businesses do not record private or personal transactions of owners. These are transactions of the owners that are unrelated to the operations of the business. For example, if an owner buys an iPad for personal use (instead of business use), that transaction would not be recorded as it is not an exchange between the business with another entity (does not meet the first criteria of a business transaction that needs to be recorded). ...
SWIN BUR . NE Swinburne Online Businesses need to record all