Acca f3 Financial Accounting (int) Study Text

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1: Introduction to accounting   Part A  The context and purpose of financial reporting 

5.1.3 Capital or equity 

The amounts invested in a business by the owner are amounts that the business owes to the owner. This 

is a special kind of liability, called 

capital. In a limited liability company, capital usually takes form of 

shares. Share capital is also known as 

equity.

5.1.4 Form of statement of financial position 

A statement of financial position used to be called a balance sheet. The former name is apt because assets 

will always be equal to liabilities plus capital (or equity). A very simple statement of financial position for a 

sole trader is shown below. 

A TRADER 

STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20X7 

$

$

Assets

Plant and machinery

55,000

Inventory

5,000

Receivables (from customers)

1,500

Bank

  500

  7,000

Total assets

62,000

Capital

Balance brought forward

25,000

Profit for the year

10,400

Balance carried forward

35,400

Liabilities

Bank loan

25,000

Payables (to suppliers)

  1,600

Total capital plus liabilities

62,000

We will be looking at a statement of financial position in a lot more detail later in this Study Text. This 

example is given simply to illustrate what a statement of financial position looks like. 

5.2 Income statement

An

income statement is a record of revenue generated and expenditure incurred over a given period. The 

statement shows whether the business has had more revenue than expenditure (a profit) or vice versa 

(loss).

5.2.1 Revenue and expenses

Revenue is the income for a period. The expenses are the costs of running the business for the same 

period.

5.2.2 Form of income statement

The period chosen will depend on the purpose for which the statement is produced. The income statement 

which forms part of the published annual financial statements of a 

limited liability company will usually 

be for the period of a 

year, commencing from the date of the previous year's statements. On the other 

hand,

management might want to keep a closer eye on a company's profitability by making up quarterly

or monthly statements.

A simple income statement for a sole trader is shown on the next page. 

Key term 

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Part A  The context and purpose of financial reporting 

  1:  Introduction to accounting

11

A TRADER 

INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 20X7 

$

Revenue

150,000

Cost of sales

75,000

Gross profit

75,000

Other expenses

  64,600

Net profit

  10,400

Once again, this example is given purely for illustrative purposes. We will be dealing with an income 

statement in detail later in this Study Text. 

5.3 Purpose of financial statements

Both the statement of financial position and the income statement are 

summaries of accumulated data.

For example, the income statement shows a figure for revenue earned from selling goods to customers. 

This is the total amount of revenue earned from all the individual sales made during the period. One of the 

jobs of an accountant is to devise methods of recording such individual transactions, so as to produce 

summarised financial statements from them. 

The statement of financial position and the income statement form the basis of the financial statements of 

most businesses. For limited liability companies, other information by way of statements and notes may 

be required by national legislation and/or accounting standards, for example a 

statement of 

comprehensive income and a statement of cash flows. These are considered in detail later in this Study 

Text.

Question 

Accounting information 

The financial statements of a limited liability company will consist solely of the statement of financial 

position and income statement. 

Is this statement correct? 

A True 

B False 

Answer

The correct answer is B. As shown above other statements, such as a statement of cash flows, are usually 

needed.

One of the competences you require to fulfil performance objective 4 of the PER is the ability to prioritise 

and plan your work to meet objectives, managing conflicting pressures and making best use of time and 

resources. In the course of your F3 studies, you will be demonstrating this competence. 

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1: Introduction to accounting   Part A  The context and purpose of financial reporting 

Chapter Roundup 

Financial reporting is a way of recording, analysing and summarizing financial data. 

 

Businesses of whatever size or nature exist to make a 

profit.

 

You should be able to distinguish the following. 

 – Financial 

accounting 

 – Management 

accounting 

 There 

are 

various groups of people who need information about the activities of a business. 

 

The principal financial statements of a business are the 

statement of financial position and the income

statement.

Quick Quiz 

1 

What is financial reporting?  

2 

A business entity is owned and run by Alpha, Beta and Gamma. 

What type of business is this an example of? 

A Sole 

trader 

B Partnership 

C 

Limited liability company 

D Don't 

know 

3 

Identify seven user groups who need accounting information.  

4 

What are the two main financial statements drawn up by accountants?  

5 

Which of the following is an example of a liability? 

A Inventory 

B Receivables 

C 

Plant and machinery 

D Loan 

Answers to Quick Quiz 

1 

A way of recording, analysing and summarising financial data. 

2 

B. 

A partnership, as it is owned and run by 3 people. 

3 See 

paragraph

 

4.2

. 

4 

The income statement and the statement of financial position. 

5 

D. 

A loan. The rest are all assets. 

Now try the question below from the Exam Question Bank

Number

Level

Marks

Time

Q1

Examination

2

2 mins 

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