Fundamentals of Business

2. Profit and Loss Account

Summary of a management's performance as reflected in the profitability (or lack of it) of a firm over a certain period. It itemizes the revenues and expenses of past that led to the current profit or loss, and indicates what may be done to improve the results. An income statement is a 'movie' that depicts what happened over a month, quarter, or year.

It is based on a fundamental accounting equation
Profit/Loss = Revenue - Expenses
and shows the rate at which the owners equity is changing for better or worse.

3. Balance sheet
Asset
Anything tangible or intangible that value can be attached to it.
Examples include cash, equipment, buildings, and land, Registered trademarks, patents.

Asset characteristics
Assets have three essential characteristics:
They embody a future benefit that involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows.
The entity can control access to the benefit; and, The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred. It is important to understand that in an accounting sense an asset is not the same as ownership. In accounting, ownership is described by the term equity.

The accou accounting equation nting relates assets, liabilities liabilities, and , owner's equity equity: Assets + Capital (equity) + Liab Liabilities ilities

The accounting equation is the mathematical structure of the balance sheet.
Assets are usually listed on the balance sheet. It has a normal balance, or usual balance, of debit (i.e., asset account amounts appear on the left side of a ledger).

Assets are formally controlled and managed within larger organisations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non physical assets.

Classification of assets
Assets may be classified in many ways. In a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country. Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are continually turned over in the course of a business during normal business activity.

There are 5 major items included into current assets:
Cash - it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, checks, bank drafts).
Short Short term investments - include securities bought and held for sale in the near future to generate income on short term price differences (trading securities).

Receivables - usually reported as net of allowance for uncollectible accounts.
Inventory - trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule.

Prepaid expenses - these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.