MEKELLE UNIVWRSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEP’T OF ACCOUNTING AND FINANCE

FUNDAMENTALS OF ACCOUNTING I

By Moges G.

March, 2024

1
 CHAPTER ONE

INTRODUCTION TO
ACCOUNTING AND
BUSINESS

2
 Nature of Business
 Business is an organization or economic
entity operate to earn profit.
Business is an activity of organization in which
economic resources are supplied to
customers at a price higher than their cost.
The objective of a business organization is to
maximize profits.

3
 Types of Businesses
 There are three different types of businesses
based on their type of activities :
I. Service businesses: These are
organizations which provide intangible
products to customers.
II. Merchandising businesses: are
organizations which purchase tangible
products from other businesses and sells
them to customers without adding any
value. In this sense, merchandisers bring
products and customers together.
III.Manufacturing businesses: are
organizations which change basic inputs4
 Forms of Business
Organizations
 There are three basic forms of businesses in
the world.
I. Sole Proprietorships
 A sole proprietorship is a business owned by

one person called Proprietor and usually

managed by the owner.
 No special legal requirements must be met

to start a sole proprietorship and usually only

a limited investment is required to begin
operations.
 Is a separate entity for accounting purposes

(Business entity Concept) but it is not a

separate legal entity from the owners. 5
 Cont’d
II. Partnerships
 A Partnership is an association of two or

more persons who own and manage a

business for profit.
 A partnership is not a legal entity separate

from the owners but an association that brings

together the talents and resources of two or
more people.
 The owners of a partnership are known as

partners.
 The partners share the profits and losses of

the partnership according to an agreed –on

formula.
6
 Cont’d
 A Partnership is characterized by Unlimited
Liability, Limited Life, mutual agency or Co-
ownership.
 All partners have unlimited liability for their
company’s debt, which means that each
partner is personally liable for all the debts of
the partnership.
 It may be dissolved when a new partner is
admitted; when a partner withdraws, goes
bankrupt, retires, or dies; or when the
terms of the partnership agreement are met.
 In the modern world, Partnership formations
have been modified to terms such as; Limited 7
 Cont’d
III. Corporations
 Association of individuals created by law or

under authority of law to act as a single

entity or legal person.
 A business organized as a separate legal

entity with ownership divided into

transferable units of capital is called a
corporation.
 The owners of a corporation are called

stockholders or shareholders.
 A corporation is a separate legal entity (the

owners (stockholders) are not personally

liable for the debts of the corporation).
8
Types of Business Organization In
Ethiopia
 A business organization under Ethiopian law refers to
a legal entity that engages in business activities.
It is regulated by the Ethiopian government through
the Ethiopian Investment Board and the Ethiopian
Commercial Code.
Ethiopian law requires businesses to obtain a business
license from the government in order to operate.
 Businesses must also register with the Ethiopian
Investment Board and the Ethiopian Commercial Code

9
 Types of Business
Organization in Ethiopia

Form Wise Objective Wise

Commercial Non-Commercial

Partnership Share Company

 General P/ship  Share Company

 Limited P/ship  Private Limited Company
 Limited Liability P/ship  One Person Private Limited Company
 Joint Venture
10
 Cont….
I. General Partnership
a business organization consisting of partners who
are each jointly and severally liable with the
partnership itself for the obligations of the partnership.
All partners share in the profits, managerial
responsibilities, and liability for debts equally.
If the partners plan to share profits or losses
unequally, they should document this in a legal
partnership agreement to avoid future disputes.
The formation of a general partnership shall
be of no effect unless established through a
memorandum of association.

11
 Cont….
II. Limited Partnership
A limited partnership comprises partners with different
types of liability:
General partners who are in full liable jointly and
severally for the obligations of the partnership and
Limited partners who are liable for the obligations of
the partnership only to the extent of their pledged
contributions.
 The general partner oversees and runs the business
while limited partners do not partake in managing the
business.
However, the general partner of a LP has
unlimited liability for the debt, and any
limited partners have limited liability up to the
12
 Cont….
III. Limited Liability Partnership
A limited liability partnership (LLP) is a type of
partnership where all partners have limited liability.
 All partners can also partake in management activities.
 The partnership has legal personality distinct from that
of the partners.
 The death, bankruptcy, departure from the
partnership or any other fact affecting the partners shall
have no impact on the existence, rights or obligations of
the partnership.
 Combines the attributes of a partnership and a
corporation
Its owners are called members
13
 Cont….
IV. Joint Ventures
It is a secret type of partnership in that the joint venture
agreement as among the ventures lacks the
characteristics of publicity or registration or
transparency to third parties.
 It is only one of the partners (the manager) who is only
known to the public as if he is doing his own individual
business.
 It has no legal personality and its existence is unknown
to third parties.
A joint venture is often a type of general partnership that
remains valid until the completion of a project or a
certain period passes.
14
 Cont….
V. Share Company
 A share company is a company whose capital is fixed in
advance and divided into shares and whose liabilities
are met only by the assets of the company.
 Compared to the rest of business organizations in
Ethiopia, this is the most modern and well organized
corporate form.
It is only such companies in Ethiopia that can participate
in a high profile business such as banking and insurance.
 Unlike partnerships, their existence is perpetual than
contingent.
 It is only share companies in Ethiopia that can issue
negotiable securities, such as equity instruments (shares)
or debt instruments (debentures). 15
 Cont….
VI. Private Limited Company
 A PLC is a business organization whose capital is fully
paid in advance, divided into shares and whose members
are not liable for the debts of the company.
Unlike Share Company, the shares of the private limited
company shall not be open for subscription by the public.
 The company is characterized by, not having less than
two or more than fifty members, and it may not issue
transferable securities.
A private limited company is instituted when its capital
is paid-up fully and the memorandum of association is
entered in the commercial register.

16
 Cont….
VII. One Person Private Limited Company
 A one member private limited company is a business
organization incorporated by the unilateral declaration of
a single person.
 OPLC is effectively a company that has only one
shareholder as its member.
An OPLC is a hybrid structure. It combines most of the
benefits of a sole proprietorship and a company form
of business.
The Company has its own legal personality separate and
distinct from that of the member.
The promoter is not personally liable to
repay the debts of the company.
17
Evolution of Accounting
Concepts
Accounting as other professions has evolved
in response to the social and economic
needs of the society.
The first known description of the Double
entry system was published in Italy in
1494 by Luca Pacioli, a mathematician who
thought in various universities.
Luca Pacioli is known to be the father of
Accounting.

18
 Meaning of Accounting
 It can be defined in various ways. Some of
the common definitions are as follows;
 Accounting is defined as ‘‘a process of
identifying, measuring, recording and
communicating economic events of an
organization (business or non-business) to
interested users of the information.’’(AICPA)
 Accounting is an art of recording, classifying,
summarizing and interpreting the business
transactions.
 It is an system of collecting, processing, and
reporting the financial information to decision
19
 Let’s take a closer look at the activities
involved in the process:
1. identifying – involves selecting those
events that are considered evidence of
economic activity relevant to a particular
organization.
2. Measuring- measuring economic events
in terms of money( birr or cents)
3. Recording- consists of keeping a
chronological diary of measured events in
an orderly and systematic manner. In
recording, economic events are classified
and summarized.
4. Communicating- The information is
communicated through the preparation 20
 BOOKKEEPING VERSUS ACCOUNTING
21

 Bookkeeping is the process of recording

business activities, and keeping the records.
 It is the record- making phase of
accounting.
 Accounting “the art of recording, classifying
and summarizing in a significant manner
and in terms of money, transactions and
events, which are, in part at least, of a
financial character and interpreting the
results thereof”.
 Accounting includes bookkeeping.
 Business
 The central role of Accounting in
business is to provide information for
managers, employees and other users.
 Accounting can be defined as ‘‘an
information system that provides reports
to users about the economic activities
and condition of a business’’.
Accounting is said to be the “language
of business” because it is the means
by which businesses’ financial information
is communicated to users.
 The better you understand the language 22
 Cont’d…
The process by which accounting
provides information to users is as
follows:
1. Identifying users.
2. Assess users’ information needs.
3. Design the accounting information
system to meet users’ needs.
4. Record economic data about business
activities and events.
5. Prepare accounting reports for users.
23
Users of Accounting Information

Today’s accountants focus on the ultimate

needs of those who use accounting
information, whether the users are inside or
out side the business.
Accounting is not an end by itself. The
information that accounting provides allows
users to make “reasonable choices among
alternative uses of scarce resources in the
conduct of business”
The people who use accounting information
basically fall in to two categories:
 External Users, and
 Internal Users
 Cont’d…

I. External Users
 Are parties, which are not directly involved in
running the business enterprise. These include
lenders, shareholders (stock holders),
suppliers, employees and their Unions,
government (regulatory bodies) and others.
External users rely (depend on) accounting
information to help them make better decisions
in trying to achieve their goals.
The area of accounting aimed at serving external
users is called Financial Accounting.
It’s main objective is to provide to external users
information through financial statements.
 Cont’d…
Each external user has its own specified
information-need depending up on the
decisions to be made. That is to say, all
external users do not have the same
intentions (objectives) when they use the
information.
In the following paragraphs we will try to
discuss how some external users use
accounting information.
Creditors lend money or other resources to
an organization. Lenders include banks,
mortgage and finance companies. Lenders
look for information to help them assess the
ability of borrowers to repay their debts.
 Cont’d…

• Financial reports help to answer

shareholders’ questions such as:
- what is the income of the organization
for
the current and past periods?
- are the properties adequate to meet
business plan?
- will the business continue to be
profitable in
the future?
 Cont…
Employees and labor Unions
Employees and labor unions are interested
in judging the fairness of their wages and
assessing future job prospects. They also
use accounting reports as evidence to ask
for bonuses, when the organization is
successful.
Government
The Inland Revenue Authority requires
organizations to prepare financial reports,
in order to compute taxes.
 Cont’d…

II. Internal Users

 These are persons that are directly
involved in managing and operating an
organization. They include managers and
other important decision makers.
 The internal role of accounting is to

provide information that will help to

improve the efficiency and effectiveness
of an organization.
The area of accounting aimed at serving
the decision-making needs of internal
users is called Management
Accounting.
 Cont..
Internal users often have access to a
lot of private and valuable information.
Internal reports aim to answer
questions like:
 What are manufacturing costs per
product?
 Which service activities are most
profitable?
 What level of sales is necessary to
break even?
 Summary of Users of Accounting Information

31
THE ACCOUNTING PROFESSION
 If you just joined the accounting
profession, you may be wondering
what job you will be doing in the
future.
 You probably would apply your

expertise in one of the following three

major fields:
 Public Accounting
 Private Accounting &
 Not for profit Accounting
 CONT’D
 A) Public Accounting
 In Public Accounting you would offer expert service
to the general public in much the same way that a
doctor serves patients and a lawyer serves clients.
 In a public accounting, accountants offer expert
services to the general public on a fee basis.
 Public accountant who have met standard
education, experience and examination requirements
may become certified public accountants,
commonly called CPAs.
 a certified Public Accountant (CPA) examines, the
financial statements of companies and expresses
opinion as to the fairness of presentation. When
presentation is fair, users consider the statements to
be reliable.
 CONT’D
 A) Private Accounting
 An accountant may be an employee of a
business enterprise i.e. as a chief
accountant, controller, or financial director is
said to be engaged in Private Accounting.
 The scope of activities and responsibilities
of private accountants varies widely.
 They are frequently referred to as
managerial accountants or cost accountants
if they are employed by a manufacturing
firms.
 In private accounting, you would be involved
in one of the following activities:
 Cont…d
 Cost Accounting: Determining the cost of producing
specific products.
35
 Budgeting: Assisting management in quantifying goals
concerning revenues, costs of goods sold, and
operating expenses.
 General Accounting: recording daily transactions and

preparing financial statements and related information.

 Accounting information systems: designing both

manual and computerized data processing systems.

 Tax Accounting: helps clients follow rules set by tax

authorities. It includes tax planning and preparation of

tax returns.
 Internal Auditing: reviewing a company’s operations

to determine compliance with management policies

and evaluating efficiency of operations.
 CONT’D
C) Not For Profit Accounting

 Like businesses that exist to make a

profit, not - for-profit organizations also
need sound financial reporting and control.
 Donors to such organizations want
information about how well the
organization has met its objectives and
whether continued support is justified.
 In each of these cases, accounting
expertise is highly valued
 Accounting Principles and Concepts


37
Accounting, as it is true for other
disciplines, has got its own principles and
practices.
 One must be able to understand these

principles and practices to understand

and prepare financial statements and
reports.
 These principles guide accountants how

to record and report business activities

 Their main purpose is to guide
accountants in measuring and reporting
financial events of business enterprises
 CONT’D…
 Currently, our world has two well known
38 Accounting standards guiding the accountants in
recording, preparing, & communicating
accounting reports to interested users. These are;
 US- based Generally Accepted Accounting
Principles (GAAP) & UK-based International
Financial Reporting Standards (IFRS).
 GAAP are accounting standards that are issued
by independent Organization called Financial
Accounting Standard Board (FASB) while IFRS
were issued by International Accounting
Standard Board (IASB).
 Currently, More than 144 countries of our world
have prescribed to IFRS including Ethiopia.
 Cont’d
 IFRS aims to make financial statements
39 consistent, comparable, and transparent
across the world.
 Those Standards prescribe:
 the items that should be recognized on
financial statements
 how to measure those items;
 How to present them in a set of financial
statements; and related disclosures about
those items.
 These standards are basically designed for
profit oriented entities and some of them will
be discussed in this chapter;
 Cont’d
i. Business Entity Concept
40 • Accountants frequently refer to a business
organization as an accounting or business
entity.
• Business entity is any business organization,

such as a “super market”, laundry, barberry, or

a hotel, which exist as an economic unit
• From accounting point of view each business

enterprise has a separate existence from its

owners, creditors, employees, customers
and other businesses.
• This separate existence of the business
enterprise is known as the business entity
concept.
 Cont’d
ii. The cost principle
41
The cost principle states that “properties and
services acquired by business enterprises must
be recorded at actual amounts paid or assumed
in acquiring the properties.”
iii. Monetary Unit Assumption
All business activities (events) are recorded in
terms of money (Birr, Dollar, Pound or any
other currency).
Money is the only factor common to all
business activities.
The monetary unit used by a business depends
on the country in which it exists.
 continued
42

 Revenue recognition principle

 Expense recognition principle
 Matching principle
 AABE AND ITS RESPONSIBILITIES
 The Accounting and Auditing Board of
43 Ethiopia (AABE) is established by Regulation

No.332/2014 to handle the financial reporting

and auditing standard in Ethiopia.
 AABE duties (among others)

 setting accounting and auditing

standards and code of conduct to
regulate the behaviour of professionals
 register and certify professionals and
firms to provide such services;
 providing professional qualification
training
 Review and monitor the accuracy and
 Financial Accounting & Reporting
Requirements in Ethiopia
 Ethiopia passed a financial reporting law in

44 2014 G.C which requires the use of

international financial reporting standard
(IFRS) in the country by commercial
businesses operating in Ethiopia.
 Since July 8, 2016 all financial institutions and

large public enterprises were recommended for

adoption of IFRS in preparing financial report.
 All other public interest entities and Charities

and Societies are expected to mandatorily

adopt IFRS for statutory purposes, by July 8,
2017.
 Finally, IFRS for SMEs shall mandatorily be
 THE ACCOUNTING EQUATION AND
ELEMENTS OF THE EQUATION
45
 Asset: An asset is a resource controlled by
the entity as a result of past events and from
which future economic benefits are expected
to flow to the entity.
 Liability: A liability is a present obligation of
the entity arising from the past events, the
settlement of which is expected to result in
an outflow of resources embodying economic
benefits, i.e. assets
 Owner’s Equity: Owner’s equity represents
the claims by the owner of a business to the
assets of the business.
Basic Accounting equation and its
elements
 Any organization will find properties such as a
building, furniture, land, vehicles and the like.
Such properties owned by business enterprises are
referred to as Assets.
 To buy these assets, businesses get money from
two sources: investments made by owners or
amounts borrowed from creditors. Therefore,
both owners and creditors have a claim over the
assets of the business enterprise. The claims or
rights of owners are referred to as Equities.

Economic Resources = Claims over

the resources
Assets = Equities 46
 Cont’d
 Equity may be subdivided in to two principal
types: the rights of creditors and the rights
of owners.
 The rights of creditors represent debts of the
business and are called Liabilities.
 The rights of owners are called Owners’ Equity
(Capital).

Assets = Equities
Equities = Liability +
Owner’s equity
This equation can be written as:
Assets =liability + Owner’s 47
 Cont’d
 It is customary to place “liabilities“ before “Owners
equity” in the accounting equation because creditors
have priority (preferential) rights to the assets.
Because of this, the owners have a residual claim over
the assets.
 EXAMPLE: Assume KK Garage has total assets of Br.
50,000, liabilities of Br 20,000 and owner‘s equity of Br
30,000.
 If the business is to be closed, the assets of the
company will be sold and distributed to the claimants.
 Required
 a) Find the share of creditors & Owners, If asset is sold
for Br. 60,000, 30,000 & 20,000?
48
 BUSINESS TRANSACTIONS
49
 Business transactions are the occurrence of economic
events of a condition that should be recorded because
they affect the financial position of the business
enterprise.
 are the raw materials of accounting reports
 Business transactions cause changes in the assets,
liabilities, or owner’s equity of a business enterprise
/organization transactions may be classified in to two
broad groups
 External transaction : transactions occurred between
the organization and outsiders such as payment of debts,
sales on account, etc.,
 Internal transactions: Expiration or transfer of costs
within the firm. Such as depreciation of plant assets,
estimation of doubtful accounts expense.
 Transactions and the
50
Accounting Equation
 All business transactions from the simplest
to the complex can be stated in terms of the
resulting change in the three basic elements
of the accounting equation.
 However, it is important to remember that
each transaction leaves the equation in
balance.
 Assets always equal the sum of liabilities
and owner’s equity.
 Cont’d
 Business transactions are economic events that
should be recorded because they affect the
financial position of the business enterprise
 Transaction can be an exchange (such as the
purchase or sale of property, payment or collection
of a loan etc.) between two or more parties
 Transaction can also be an event that has the
same effect as an exchange transaction but
doesn’t involve an exchange transaction.
For a given transaction to qualify to be recorded it
has:
1. to be related to the business enterprise
2. to be measurable in terms of money
3. to be completed / happened/ action.
51
 Cont…d
Illustration
 Suppose Ato Haben Zemaryam establishes a sole
52
proprietorship to be known as Haben Garage, on
September1, 2007. During September, the business
engages in the following transactions:
Transaction (1)- Ato Haben starts business by
depositing Br. 10,0000 in a bank account opened in the
name of Haben Garage.
Transaction (2) - Effective Garage bought land for Birr
7,500 in cash, to be used as a future site for the
business.
Transaction (3) -Ato Haben purchases birr 850 of
gasoline, oil and other supplies from various suppliers
agreeing to pay in the near future.
Transaction (4) – During the month Haben Garage paid
Birr 400 to creditors on account.
 Cont…d
Transaction 5 – During the first month of operation,
53
Haben Garage earned service fees of Birr 4,500
receiving the amount in cash for the garage
services it rendered.
Transaction 6-During the month of September,
Haben Garage incurred and paid wages, Birr 1,125;
rent, Birr 850; utilities, Birr 150; miscellaneous, Birr
75.
Transaction 7- At the end of month it is determined
that the cost of the supplies on hand is Birr 250, the
remainder (850-250) having been used in the
operations of the business.
Transaction 8- Ato Haben Zemariam, the owner,
withdrew Birr 1000 for his personal from the
business.
 Assets Liability Owners equity
Tra. No Cash + Supplies + Land A/Payable AshuGem.Capital Type of owner’s Trx
1 +10,000 - - - + 10,000 O. Investment
Bal Birr 10,000 - - - Birr 10,000
254 -7,500 - + 7,500 - -
Bal Birr 2,500 - Birr 7,500 - Birr 10,000
3 - +850 +850
Bal Birr 2,500 Birr 850 Birr 7,500 Birr 850 Birr 10,000
4 -400 - -400
Bal Birr 2,100 Birr 850 Birr 7,500 Birr 450 Birr 10,000
5 + 4,500 - - - + 4,500 Service fee
Bal Birr 6,600 Birr 850 Birr 7,500 Birr 450 Birr 14,500
6 -2,200 - - - -1,125 Wages Exp.
-850 Rent Exp
-150 Utilities exp
-75 Misc exp

Bal Birr 4,400 Birr 850 Birr 7,500 Birr 450 Birr 12,300
7 - -600 - - -600 Supp exp
Bal Birr 4,400 Birr 250 Birr 7,500 Birr 450 Birr 11,700
8 -1,000 - - - -1,000 Withdrawal
Bal Birr 3,400 Birr 250 Birr 7,500 Birr 450 Birr 10,700

Total Assets =Birr 11,150 Total L and O. E = Birr 11,150

 FINANCIAL STATEMENTS OF BUSINESS
 After the effect of the individual transactions has
55
been determined, the essential information is
communicated to users at certain intervals.
 The accounting reports, which communicate this
information, are called financial statements.
 Financial statements are said to be the central
features of accounting because they are the
primary means of communicating important
accounting information to users.
 Financial statements are the means of
transferring the concise picture of the
profitability and financial position of the business
to interested parties.
 Cont…d
56

1 Profit/loss Statement
 The Profit/loss statement is a financial statement
that summarizes the amount of revenues earned
and expenses incurred by a business over a period of
time.
 It reports the profitability of the business by
comparing revenues and expenses for a stated
period of time such as a month or a year.
 If the revenue of a period exceeds the expenses of
that same period, net income results.
 If expenses are greater than the revenues of a
period, we say there is a net loss, that is, the
business has operated unprofitably.
 Cont…d
57
Haben Garage
Profit/loss statement
For the Month Ended September 30, 2007

Revenues:
Service Fee Birr 4,500.00
Expenses:
Wages Expense Birr 1,125.00
Rent Expense 850.00
Supplies Expense 600.00
Utilities Expense 150.00
Misc. Expense 75.00
Total Expenses Birr 2,800.00
 Cont…d
2 Owner’s Equity Statement
 This is a statement that summarizes the
58
changes in owner’s equity for a specific
period of time.
 Owners equity is affected the following
factories
Owner’s Equity

Decreased by: Increased by: Owner’s Investment

Owner’s withdrawals and Expenses and Revenues
 Cont…d
59

Haben Garage
Statement of Owner’s Equity
For the Month ended September 30, 2007

Ashu G. Capital, September1 Birr -0-

Add: Investments during the Birr 10,000.00
month
Net income 1,700.00
11,700.00
Less: Drawings 1,000.00
 Cont…d
60

3 Financial position statements

 lists the company’s assets, liabilities and owner’s equity as
of a specific date- usually at the end of a month or year.
 There are two commonly used formats of the balance
sheet:
 The account format: This lists assets on the left side and
equities (i.e. liability and owner’s equity) on the right side.
Assets =Liability + Owner’s Equity
 The Report Format -Lists assets, Liability and Owner’s
equity vertically
Assets
Liability
Owner’s Equity
 Cont…d
61

Haben Garage
Financial position statement
September 30, 2007

Assets Liability
Land………………7,500.00 Accounts payable…… Birr
Supplies……………250.00 450.00
Cash…………Birr 3,400.00 Owner’s Equity
_________ Ato Haben Zem., Capital Br10,
Total Assets……..11,150.00 700.00.
Total Liabilities and
Owner’s equity……...Birr
 Cont…d
62

4 Statement of cash flows

 The statement of cash flows consists of three sections

1 Cash Flows from Operating Activities:-reports a summary of

cash receipts and cash payments from operations.
 The net cash flow from operating activities will normally differ

from the amount of net income for the period because revenues
and expenses may not be recorded at the same time that cash
is received from customers or paid to creditors.
2 Cash Flows from Investing Activities:-reports the cash
transactions for the acquisition and sale of relatively permanent
assets.
3 Cash Flows from Financing Activities:-reports the cash
transactions related to cash investments by the owner,
borrowings, and cash withdrawals by the owner.
 Haben Garage
Statement of cash flows
September 30, 2007
63

Cash flows from operating activities

Cash received from customers Birr 4,500.00
Cash payments for expenses and ( Birr 2,600.00)
creditors:
Net Cash flows from operating Birr 1,900.00
activities
Cash flows from investing activities
Cash payments for acquisition of land (Birr
7,500.00)
Cash flows from financing activities
Cash received as owner’s Birr 10,000.00
 Financial Statement for
Corporation
64

Retained Earnings Statement

 A statement of retained earnings or a statement of
stockholders’ equity is included with every set of financial
statements of a corporate type of business enterprises.
 In a corporate enterprise the emphasis in reporting changes
in stockholders (owners’) equity is on the changes in
retained earnings, or net income retained in the business.
 The changes in retained earnings that have occurred during
a period are reported in a retained earnings statement.
 In a corporate (corporation) business, changes in the amount
of earnings retained in the business would have resulted
from:
1. Net income, and
2. Distribution of earnings, called dividends, to
owners.
 Cont…d
65

Haben Garage
Retained Earnings Statement
For Month Ended Sept 30, 2007

Net Income for the Month..............................................

Birr 1,700
Less: Dividends...............................................................
1,000
Retained Earnings, September 30, 2007.....................
Birr 700
 Cont…d
66 Haben Garage
Financial position statement
September 30, 2007
Assets
Land ........................................................................................
Birr 7,500
Supplies ..................................................................................
250
Cash.........................................................................................
3,400
Total assets..............................................................................
Birr 11,150
Liabilities
Account payable......................................................................
Birr 450
Stockholders’ Equity
Capital stock........................................................................... Birr
10,000
 Cont…d
67

Haben Garage
Statement of Cash Flows
For Month Ended September 30, 2007
Cash flows from operating activities:
Cash received from customers........................................
Birr 4,500
Deduct cash payments for expenses and
Payments to creditors ...................................................
2,600
Net cash flow from operating activities....................................
Birr 1,900
Cash flows from investing activities:
Cash payments for acquisition of land...................................
(7,500)
Cash flows from financing activities:
Cash received from sale of capital stock......................
Birr 10,000
 END OF CHAPTER ONE
68

THE
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