Under step 20 we will be covering in more details part of a financial statements. In previous videos we have seen of balance sheet income statement and cash flow statement. We have prepared balance sheet and income statement for company Zeta and here in more details we will be covering what parts should be included into the balance sheet and income statement.
Balance sheet has assets and assets are all material or immaterial or monetary items which are owned by the business and the called assets and the assets we must have monetary value and also the business must have the right to possess those assets. We can classify assets into two groups current assets. This is the first group and these are assets which are converted into cash within a period less than 1 year and of course cash is also included and examples can be inventory cash accounts receivable prepaid expenses.
These are items which are included into current assets category and as I mentioned before that there is an obligation to disclose separately total value of current assets and total value of the other group long term assets. Long term assets are those which are used by the business in its operations for a period longer than one year and examples can be investments, fixed assets or plant assets we can call them plant assets and intangible long term assets.
So this is the second group of the assets and this is also separately disclosed on the balance sheet. Then we go to liabilities. Liabilities are one source of financing we should use by the business to acquire assets so these are adept to outsiders, creditors and there are two groups. Current liabilities, these are liabilities which had you within one year. Usually here we can find accounts payable salaries payable, taxes payable and interest payable and a long term liabilities.
These are liabilities which had you after one year long term loans or other liabilities which have maturity date of the period longer than one year and again these types of liabilities they must be separately presented on the balance sheet. The other one is equity. Equity is another type of financing which is used to acquire assets and equity it belongs to the shareholders or investors who invest it financial means into the business and such financing that does not have any maturity date.
And investors we have a right to get back via means invested, however only after the business pays its liabilities and when it is liquidated to a close. Equity includes share capital which needs to be separately disclosed in the balance sheet and retained earnings. This is accumulated profit or accumulated loss generated by business operations starting from a establishment and now distributed to the shareholders in the form of dividends.
The other part of the financial statements is related to the income statement income, gross increase in equity and it is resulted by receiving income selling goods or provision of services and the other part expenses and expenses it is coursed or asset consumed in the process to and income so expenses are only recognized when they are incurred to get more income and these two parts they are included in the income statement.
Before going in to the preparation of a financial statements for the company Zeta on the step 18 we will be covering examples of the financial statements so basically there are 3 types of financial statements balance sheet, income statement and casual statement. So what is balance sheet?
Balance sheet reflects structure of the assets and financing sources which I use to finance those assets and this is a reflection of the structures of a particular date for example as of year round or as of one hand and example is presented in the next light here how balance sheet looks like on one side we have assets and on the other side we have liabilities and equity.
Assets are divided into categories of current assets and long term assets and under current assets we have cash, accounts receivable and inventory and on the balance sheet we will need to present total value of current assets separately and long term assets we include fixed.
We can call them plant assets, cost accumulated depreciation which his deducted from the cost and fixed assets net value on their book value and then we will have to indicate total value of assets.
On the right side we have current and long term liabilities which must be separately indicated we will need to show total value of liabilities and equity accounts is share capital and retained earnings and again we will have to show total value of equity separately.
Then we calculate total liabilities and equity and there must be an equality between total value of assets and total value of liabilities and equities so there must be a balance that is why this financial is called balance sheet so here we see assets and we see how these assets are financed by liabilities and by equity.
My next one is income statement and income statement it reflects results of operations for a particular period of time. It is not as off particular date but it is for particular period of time of the year or for a month and example this shows multiple step income statement.
Her ewe have revenues, cost of sales, disclosed separately. We have gross profit calculated. We have operating expenses and operating profit interest expenses profit before tax, tax and net profit and you can see that we start from revenue and then we deduct from revenue all the expenses which were incurred to that revenue.
So this is an example of the income statement and this layout should be used to prepare income statement for our company Zeta. And the third one is cash flow statement and cash flow statement indicates how cash position of the company was changing during a particular period of time.
This is not as off particular date but for a period of time the same as income statement and example can be like this and please note that cash flow statement it shows changing cash which means that in income statement we might have one amount which is net profit or net income and on the cash flow statement we will have is a different amount which is changing cash.
These amounts should not be equal. They might be equal but it is necessarily required that they are equal. We have three parts of the cash flow statement operating activities. Here we show all the cash flow in flows and cash out flows which relate to the main activities of the business and you can see them on the left side here we have net income.
We have change in accounts receivable, change in inventory and change in accounts payable. These are items which relate to the main activities of the business and which either generate cash or cash might be spent for those purposes.
On the right side you can see the other parts of the cash flow statement and those parts are investing activities here we show cash earned or cash spent on the investments including plant assets sale or acquisition of planned assets and also other investments and financing activities.
These part includes change in depth and change in equity and dividends paid so here we will be reflecting cash in flow or out flow which is related to the financing activities performed by the business and the net changing cash this is the result of cash flow statement which is important because will be able to determine whether the business generated cash, generated additional cash during the accounting period or whether it spent too much cash so net changing cash was negative.
After we have recovered examples of the main financial statements we are able to prepare financial statements for Zeta including balance sheet and income statement and on the next line you can see balance sheet for company Zeta which was prepared based on the adjusted trial balance.
How we do that? We take all the accounts which had debit balance and include them into the asset side so we show them on the asset side and these accounts are petty cash, cash in bank, prepaid insurance, accounts receivable office stationary inventory office space and important point to note that accumulated depreciation account it had credit balance.
However, since it is a contrary account to the office space we must include it on the asset side with minus in order to show office space net book value. The difference between cost of office space and accumulated depreciation and we calculate total value of assets.
On the other side on the right side we take all the accounts which had credit balance from the adjusted trial balance and we put them either on liability side or on equity. We just know that accounts payable and seller is payable represent liabilities so we include them into liabilities and we know that share capital and retained earnings represent equity accounts so we include them under equity and we calculate total liabilities and equity.
You can see that there is an equality so total assets equal to total liabilities plus equity so we have prepared a balance sheet correctly. And the next financial statement is income statement here this is a simple layout. We include total income and we include total expenses. So from the adjusted trial balance we adopt total expenses and we indicate them here and net profit is a difference between income and expenses and this is an income statement for company Zeta.