N4 Introductory Financial Accounting | Student Book


Step 7: Create financial statements Your financial statements are the biggest deliverable you’ll receive as a result of the accounting cycle. The Statement of Profit and Loss and Statement of Financial Position are accurate records of what happened in your business over the last accounting cycle. (The cash flow statement isn’t mandatory, but we recommend making one of those, too.) They’re important documents for anyone outside your business who needs to be able to compare your business to others (investors, lenders, etc.), but they’re also incredibly valuable to business owners. Knowing how to read and interpret your financial statements can help you stay on top of your business’s finances and strategise for growth.


Step 8: Make closing entries The last step in the accounting cycle is making closing entries and preparing your business for the upcoming accounting cycle. This means closing out temporary accounts like revenue and expenses and folding them into permanent accounts, like retained earnings.


Once this final step is complete, you can start the whole process over again. 4.3 The accounting equation


The accounting equation is the foundation of a double entry accounting system. For each transaction, the total debits equal the total credits. For every change in value of one account in the accounting equation, there must be a balancing change in another.


The financial position of a company is measured by the following items: 1. Assets (what it owns) 2. Liabilities (what it owes to others) 3. Owner’s equity (the difference between assets and liabilities).


The accounting equation offers us a simple way to understand how these three amounts relate to each other. The accounting equation is as follows:


Assets = Owner’s Equity + Liabilities


If a business keeps accurate records, the accounting equation will always be “in balance,” meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of the business’s accounts. For example, when a business purchases inventory by paying cash, one asset will increase (inventory) and one asset will decrease (cash).


DATE GENERAL LEDGER


ACCOUNT DEBIT


ACCOUNT CREDIT


ASSETS = OWNERS EQUITY +


LIABILITIES


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