Accounting Reference
Accounting is the task of collecting and sorting an organisation’s financial information. It comprises a number of dated transactions, each linked to a Debit and a Credit Account which update two Reports: The Statement of Profit or Loss and the Statement of Financial Position. These Reports are similar across all standards, with some variation depending on which accounting standard you subscribe to, for example, GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards).
Statement of Profit or Loss
The Statement of Profit or Loss captures revenues, income and expenses and is also known as an Income Statement or Statement of Comprehensive Income.
Items that make up the Statement of Profit or Loss include:
| Field | Description |
|---|---|
| Sales | An organisation's income, normally generated from Customer Invoices or Point of Sale systems. |
| Cost of Sales | The direct costs incurred in generating an income. Often generated from Goods Issued and Purchases for materials and outwork. |
| Gross Profit | Sales less Cost of Sales. Gross Profit is an important indicator that an organisation's pricing is profitable. |
| Other Income | For example, Interest or Rent received which are not part of an organisation's core business. This income might be generated using Customer Invoices or can be captured from source documents, like Bank Statements. |
| Operating Expenses | All the expenses needed to keep the business running (e.g. salaries, rentals, transport costs). These expenses can be entered directly from source documents, or by using Purchase Orders. |
| Net Profit / Loss | The net result of an organisation's trading activities. Typically, profit is calculated by adding Gross Profit and Other Income and subtracting Operating Expenses. |
Statement of Financial Position
The Statement of Financial Position is a snapshot of an organisation's financial position on a specific date. The snapshot shows assets, investments, liabilities, and owner's equity. The statement is also known as a Balance Sheet.
Items that make up the Balance Sheet include:
| Field | Description |
|---|---|
| Assets | What an organisation owns or is owed. Assets are divided into Fixed Assets (e.g. Property and Furniture) and Current Assets (e.g. Inventory, Receivables). |
| Investments | Investments made by the organisation, such as subsidiary organisations. |
| Liabilities | What an organisation owes. Liabilities are divided into Long-term Liabilities (e.g. mortgages) and Current Liabilities (e.g. Payables, Tax Due). |
| Equity | The owners' share of the business which includes Capital Accounts (shares) and Retained Earnings or Losses. |
Trial Balance
The Trial Balance is a summary of all the accounts in an organisation and shows whether the double-entry system was correctly applied. If the debit and credit balances of all the accounts agree, then all the transactions comply with the double-entry system. If the totals do not agree, there is some corruption in the accounting system.