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Books of prime entry, ledgers and accounts in ledgers will be explained later. 1 A simple representation of the statement of financial position The accounting equation is a simplified way of showing a statement of financial position. The equation is: Assets A = = Equity E + + Liabilities L Each new financial transaction affects the numbers in the accounting equation, but the accounting equation must always apply. Total assets must always be equal to the combined total of equity plus liabilities.

For example, if a machine is sold for $15,000 when its value in the statement of financial position is $10,000, there is a gain on disposal of $5,000. The term ‘revenue’ means income earned in the course of normal business operations. In an income statement, revenue and ‘other income’ are reported as separate items. 8 „ expenses arising in the ordinary course of activities, including the cost of sales, wages and salaries, the cost of the depletion of non-current assets, interest payable on loans and so on „ losses arising from disasters such as fire and flood, and also losses from disposing of non-current assets for less than their carrying value in the statement of financial position.

Com for Q/As, Notes & Study Guides © EWP Chapter 1: The context and purpose of financial reporting „ net profit, which is gross profit plus other income and minus other expenses. The income statement of a company is slightly different – for example, it includes the tax charge on the company’s profits. Example: income statement Entity ABC Income statement for the year ended [date] Revenue Cost of sales Gross profit Other income: Gain on disposal of non‐current asset Expenses Employees’ salaries Depreciation Rental costs Telephone charges Advertising costs Selling costs General expenses Interest charges Bad debts Net profit $ 120,000 10,000 30,000 15,000 30,000 40,000 20,000 3,000 2,000 $ 800,000 500,000 300,000 10,000 310,000 270,000 40,000 Gross profit and net profit It is usual to show both the gross profit and the net profit in an income statement.

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