CHAPTER ONE: INTRODUCTION TO ACCOUNTING

INTRODUCTION
We live in the information age-a
age-a time of communication, and a time when information is a
vital resource. In this information era, how we live, whom we associate with, and the
opportunities we have all depend on our access to and understanding of information.

The same is true for businesses (businesses are one or more individuals selling products or
services for profit). Businesses that have better access to information and that process
information more quickly and accurately do the best.
Global computer networks and telecommunications equipment now allow us to get access to
all types of business information.
But to take advantage of these, we need knowledge of information systems.
An information system is the collecting, processing, and reporting of information to decision
makers. Understanding and processing information is the core of accounting.
accounting.

The kind of information processed in accounting is financial i.e. of a monetary nature.

Providing information about what businesses own, what they owe, and how they perform is
the aim of accounting. Accounting is, an information and measurement system that identifies,
records, and communicates relevant, reliable, and comparable information about an
organization’s (a business’s) economic activities.

Therefore, a study of accounting helps people make better and informed decisions about
assessing opportunities, products, investments, and social and community responsibilities.

DEFINITION, IMPORTANCE, AND USERS OF ACCOUNTING INFORMATION

Accounting Defined
As a financial information system, 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.
Importance of Accounting and Users of Accounting Information
Importance of accounting
The main purpose of accounting is to provide financial information to be used for decision-
making. For instance, Business executives and managers need the financial information

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provided by the accounting system to help them plan and control the activities of the business.
Outsiders such as bankers, potential investors, and labour unions and others also need
accounting in formation.
In short the goal of the accounting system is to provide useful information to decision makers.
Thus, accounting is the connecting link between decision makers and business operations.
BOOKKEEPING VERSUS ACCOUNTING
People often fail to understand the difference between accounting and bookkeeping.
Bookkeeping is the process of recording business activities, and keeping the records. It is the
record- making phase of accounting. The recording of transactions in Bookkeeping tends to
be mechanical and repetitive; it is only a small and probably the simplest but important part of
accounting.
Accounting, on the other hand, includes the design of an information system that meets users’
needs. The major goals of accounting are the analysis, interpretation, and use of information.
Accounting includes system design, budgeting, cost analysis, auditing and tax planning and
preparation.
A person might become a reasonably proficient bookkeeper in a few weeks or months;
however, to become a professional accountant requires several years of study and experience.

a. Describe the basic distinction between accounting and bookkeeping.

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:
1. External Users, and
2. Internal Users
1) External Users: External Users of accounting information are
parties, which are not directly involved in running the business enterprise. These include
lenders, shareholders (stock holders), suppliers, employees and their Unions, government

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 (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. Its main objective is to provide to external users information through
financial statements.
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 well try to discuss how some external users use accounting
information.
a) Lenders / Creditors
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.
b) Share- holders (Stockholders)
Shareholders have legal control over part or all of a corporation. When it comes to a
corporation, shareholders are not directly involved in the management of the corporation.
However, as owners, they have claims over the properties of the organization. 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?
c) Employees and labour 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.
d) Government
The Inland Revenue Authority requires organizations to prepare financial reports, in order to
compute taxes.
2) Internal Users: These are persons that are directly involved in
managing and operating an organization. They include managers and other important

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 decision makers. The internal role of accounting is to provide information to help
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. 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?

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 three major fields:
 Public Accounting
 Private Accounting or
 Not – for – profit Accounting
i) 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. A major portion of public
accounting practice is involved with Auditing. In this area, 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.
Management consulting is another area of public accounting. In this case, the accountant
consults the management generally about the growth and development of the business
enterprise.
ii) Private Accounting
Instead of working in public accounting, an accountant may be an employee of a business
enterprise. In private accounting, you would be involved in one of the following activities:
1. Cost Accounting:
Accounting: Determining the cost of producing specific products.
2. Budgeting: Assisting management in quantifying goals concerning revenues,
costs of goods sold, and operating expenses.

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 3. General Accounting:
Accounting: recording daily transactions and preparing financial
statements and related information.
4. Accounting information systems:
systems: designing both manual and computerized
data processing systems.
5. Tax Accounting:
Accounting: preparing tax returns (-forms to be filled by a company and
returned to a taxing authority) and engaging in tax planning for the company.
6. Internal Auditing:
Auditing: reviewing a company’s operations to determine
compliance with management policies and evaluating efficiency of operations.
iii) 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
FORMS OF BUSINESS ORGANIZATIONS
There are three basic forms of business organizations: sole proprietorships, partnerships, and
corporations. Accountants recognize each form as an economic unit separate form its owners
(Business Entity Concept).

In this course, we will begin by the accounting for sole proprietorships because it is the
simplest form of accounting.
1. Sole Proprietorships
A sole proprietorship is a business owned by one person 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.
A sole proprietorship is a separate entity for accounting purposes (Business entity Concept)
but it is not a separate legal entity from the owners. That is, from the legal point of view, the
owner and the business are treated as one and the same. The owner will be held personally
responsible for the debts and actions of the business.
For instance, assume Flower Laundry is a sole proprietorship owned by Ato Alemu.
Assume also that the business has borrowed Birr 10,000 from the Commercial Bank of
Ethiopia and failed to pay its debts. In this case, if the Commercial Bank of Ethiopia can’t

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recover the amount it lent from the properties of the company it can go to the extent of selling
the owner’s personal properties.
2. Partnerships
A Partnership is like a sole proprietorship in most ways except that it has more than one
owner. 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. The personal resources of each partner can be called on to pay the obligations of the
partnership. That is, each partner is personally responsible for the debts of the partnership.
From an accounting standpoint, however, a partnership is a business entity separate from the
personal activities of the partners.
3. Corporations
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. The corporation issues capital stock certificates to each stockholder showing
the number of shares (orstock) he or she owns. The stockholders are free to sell all or part of
these shares to other investors at any time. This ease of transfer of ownership adds to the
attractiveness of investing in a corporation. Since a corporation is a separate legal entity,
entity, the
owners (stockholders) are not personally liable for the debts of the corporation. Their risk of
loss is limited to the amount they paid (invested). Because of this limited liability in a
corporation shareholders are willing to invest in riskier, but potentially more profitable,
activities.
Even though corporations are fewer in number than proprietorships and partnerships, they
contribute a lot to the economies of many countries in monetary terms.
The International Accounting Standards Board (IASB)
The International Accounting Standards Board (Board) is the standard-setting body of the
IFRS Foundation. Selected, overseen and funded by the IFRS Foundation, the Board has
complete responsibility for technical matters, including the preparation and issuing of IFRS
Standards. The Trustees of the IFRS Foundation are responsible for governance and

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oversight. A Monitoring Board provides a formal accountability link between the Trustees
and public authorities.
What is IFRS?
IFRS is a globally recognized set of Standards for the preparation of financial statements by
business entities.
IFRS is a set of globally accepted standards for financial reporting allowed primarily by listed
entities in over 144 countries.

The overriding requirement of IFRS is for the financial statements to give a fair presentation
(or a true and fair view).
Individual standards and interpretations are developed and maintained by the IASB and the
IFRS interpretations committee.
 IFRS is designed for use by profit-oriented entities

 Those Standards prescribe:

 the items that should be recognized as assets, liabilities, income and expense
 how to measure those items;
 How to present them in a set of financial statements; and related disclosures about
those items.
BUSINESS TRANSACTIONS AND THE ACCOUNTING EQUATION
Business transactions are economic events that should be recorded because they affect the
financial position of the business enterprise. These businesses transactions are the raw
materials of accounting reports, as cotton is a raw material for a textile factory.
A 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. A transaction can also be an event that
has the same effect as an exchange transaction but doesn’t involve an exchange transaction.
Some examples of “non exchange” transactions are losses from fire, flood; physical wear and
tear on equipment; donation of property and so forth.
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.

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(i.e. it should not be a mere promise or intention; it must be at least partially completed to be
recorded)
Assets, Liabilities and Owner’s Equity
If you have noticed, in any organization you will find properties such as a building, furniture,
land, vehicles and the like. Such properties owned by business enterprises are referred to as
Assets.
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.
Equities. If the assets owned by a business amount to Birr 50,000 the equities in the assets
must also amount to Birr 50,000. The relationship between the two may be stated in the form
of an equation, as follows:

Economic Resources = claims over the resources

Assets =Equities.

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.
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 Equity
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. To help you understand this, assume X Company has
total assets of Br. 5000, liabilities of Br 2000 and owner’s equity of Br 3000. If the business is
to be closed, the assets of the company will be sold and distributed to the claimants. In
accounting, the Owner’s are given their share after the creditors are given their entire share.
For example, assume the assets are sold for Br 4,500. The creditors will be given their share
of Br. 2,000 and whatever remained (Br.2, 500) is given to the owners. If the assets were sold
for Br. 7,000, the creditors would have been given their share of Br. 2,000 and the remaining
balance Br 5,000 would have been given to the owners.

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 Liabilities
Assets &
Capital

Transactions and the Accounting Equation

Let’s examine the effects of some of the most common business transactions on the
accounting equation. As a means of illustration, suppose Ato Dawit Gemechu establishes a
sole proprietorship to be known as Effective Garage, on September1,200x . During
September, the business engages in the following transactions:
Transection (1)- Owner’s investment
Ato Dawit starts business by depositing Br. 100,000in a bank account opened in the name of
Effective Garage. The transfer of cash from the owner to the business is on owner’s
investment. The effect of the transaction is to increase the assets (Cash) on the left side of
the accounting equation by Birr 100,000 and to increase owner’s equity by the same amount.
Assets = Liabilities + Owner’s Equity

Cash Dawit Gemechu, Capital

Tran.1 + Br. 100,000 +Br. 100,000
Balance Br. 100,000 Br. 100,000
Transaction (2)- Purchase of land for cash
Effective Garage bought land for Birr 20,000 in cash, to be used as a future site for the
business. This transaction changes the composition of the assets but it doesn’t change the
total amount of assets. It has no effect on the liability and owner’s equity of the business.

Assets = Liabilities + Owner’s Equity

Cash + Land Dawit Gemechu, Capital.
Capital.
Bal. Birr 100,000 Birr 100,000
Tran. 2 -20,000 +20,000 __-
__-_____
Bal. Birr 80,000 + Br.20,000 = ________________ 100,000__

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After the above transaction, the company will have less cash but a new asset (land ). The total
assets (cash + Land) amount to Birr 100,000, which is equal to the owner’s equity.

Transaction (3) -Purchase of Supplies On credit

Ato Dawit bought office supplies for birr 2,500 on credit, to be used by the business. Assets
can be purchased on credit (on account) basis, where the buyer promises to pay in the future.
This type of transaction is called a purchase on account and it results in a liability to the
buyer; the liability created when something is bought on credit is called Accounts Payable.

Assets______ = Liability + Owners Equity

Cash + Supplies + Land Accounts payable Dawit Gem, Captal
Bal. Birr 80,000 Br.20,000 Birr 100,000
Tran(3)
Tran(3) -___ + 2,500 - + 2,500 ___-
___-____
Bal. Br. 80,000 2,500 20,000 2,500 100,000
Birr 102,500 Birr 102,500

Transaction ( 4 ) – Payment of liability

Effective Garage paid Birr 1,500 to creditors on account. As you might have noticed, the
business bought the supplies in transaction “3” by promising to pay in the future, and as per
the promise made it is now settling its liability. The effect of this transaction on the
accounting equation is as follows:

Assets______ = Liability + Owners Equity

Cash + Supplies + Land Accounts payable Dawit Gem, Captal
Bal Br 80,000 Br. 2,500 Br.20,000 Birr 2,000 Birr 100,000
Tran.4 -1,500 - - -1,500 -___
Bal. Br. 78,500 Br.2,500 Br.20,000 Birr 1,000 Birr 100,000
Birr 101,000 Birr 101,000

Transaction 5 – Selling of service

The amount charged to customers for goods or services sold to them is called revenue.
revenue. For
instance, the amount of money that you pay to a shopkeeper after buying a pair of shoes or
something is revenue to the shopkeeper. Different titles may be used for revenue depending
up on the source of revenue. For example, a service fee for a garage, interest revenue for

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interest earned by a bank, rent income for revenues that result from renting rooms, fares
earned for revenues from a taxi service and others.

During the first month of operation, Effective Garage earned service Fees of Birr 30,000
receiving the amount in cash for the garage services it rendered.

The effect of this transaction is to increase assets (because cash is collected) and to increase
owner’s equity by the same amount as revenue is earned.

Assets______ = Liability + Owners Equity

Cash + Supplies + Land Accounts payable Dawit Gem, Captal
Bal Br 78,500 Br. 2,500 Br.20,000 Birr 1,000 Birr 100,000
30,000 - - - 30,000
Bol. Br. 108,500 Br.2,500 Br.20,000 Birr 1,000 Birr 130,000
Birr 131,000 Birr 131,000

Service can be given for cash or on credit. In this example, the service is given for cash (i.e.,
the company collects the cash on the spot service was given). But instead of requiring
customers to pay at the time of sale, a business may let the customers to pay in the future.
Such expected collections in the future result in an Accounts Receivable to the company. An
accounts receivable is as much an asset as cash to the business enterprise.
Transaction (6 ) Recording Expenses
To generate revenue, Effective Garage has to hire employees and pay salary, it has to
consume electric power and water resource and pay the bill, and so forth. The amounts of
such cash payments and using up of supplies are expenses to the business. That is, an
expense is the amount of assets consumed or services used in the process of generating
revenue. Just as revenues are recorded when they are earned, expenses are recorded when
they are incurred (i.e. when the obligation to pay them arises).
During the month of September, Effective Garage paid Birr 15,000 for different types of
expenses (birr 10,000 to salary of employees, birr 3000 Telephone, birr 1,500 for rent, and
birr 500 for advertisement).
The effect of these transactions is to decrease assets (because cash is paid) and decrease
owner’s equity. This can be stated on the accounting equation as follows:

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 Assets______ = Liability + Owners Equity
Cash + Supplies + Land Accounts payable Dawit Gem, Captal
Bal Br108, 500 Br. 2,500 Br.20,000 Birr 1,000 Birr 130,000
-15,000 - - __-___ -15,000___
Bol. Br. 93,500 Br.2,500 Br.20,000 Birr 1,000 Birr 115,000
Birr 116,000 Birr 116,000
Transaction – 7 Owner’s Withdrawal
Ato Dawit Gemechu, the owner, withdrew Birr 3000 for his personal from the business. Such
assets taken out of the business for the owner’s personal use, by the owner are called
withdrawals.
withdrawals. Owners can withdraw in cash or in kind. For example, an owner of a super
market can withdraw soap or something for his personal benefit instead of cash.
The effect of the transaction in our case is to decrease assets as cash is taken out, and decrease
owner’s Equity by the same amount. This can be stated on the accounting equation as
follows:
Assets______ = Liability + Owners Equity
Cash + Supplies + Land Accounts payable Dawit Gem, Captal
Bal Br 93, 500 Br. 2,500 Br.20,000 Birr 1,000 Birr 115,000
-3,000 - - __-___ -3,000_
-3,000___
Bol. Br. 90,500 Br.2,500 Br.20,000 Birr 1,000 Birr 112,000
Birr 113,000 Birr 113,000
Summary
The transactions of Effective Garage can be summarized in a tabular form as shown below.
Number identifies the transactions here and the balance of each item is shown after each
transaction.
Assets______ = Liability + Owners Equity
Type of
Tra. Accounts Dawit Gem. owner’s
No Cash + Supplies + Land Payable Capital Transaction
1 +100,000 - - - + 100,000 Owners
Investment
Bal Birr 100,000 - - - Birr 100,000

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2 -20,000 - + 20,000 - -
Bal Birr 80,000 - Birr 20,000 - Birr 100,000
3 - +2500 +2500
Bal Birr 80,000 Birr 2,500 Birr 20,000 Birr2500 Birr 100,000
4 -1,500 - -1500
Bal Birr 78,500 Birr 2,500 Birr 20,000 Birr1,000 Birr 100,000
5 + 30,000 - - - + 30,000 Service fee
Bal Birr 108,500 Birr 2,500 Birr 20,000 Birr1,000 Birr 100,000
6 -15,000 - - - -10,000 Salary Exp.
-3000 Teleph. Exp
- - - - -1500 Rent Exp.
-500 Adv. Exp.
Bal Birr 93,500 Birr 2500 Birr 20,000 Birr 1000 Birr 115,000
7 -3,000 - - - -3000 Owner’s
withdrowal
Bal Birr 90,500 Birr 2500 Birr 20,000 Birr 1,000 Birr 112,000
Total Assets =Birr 113,000 Total Liabilities and Owner’s Equity = Birr
113,000

The following Observations, which apply to all types of Businesses, should be noted:

Owner’s Equity

Decreased by: Increased by: Owner’s Investment and Revenues

Owner’s withdrawals and Expenses

The relationship of the above elements and their effect on the capital balance can be shown
as:
EC = BC + I – W + R - E

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 Where: EC – End Capital Balance
BC - Beginning Capital Balance.
I - Owner’s Investment
W - Owner’s Withdrawals
R - Revenue
E - Expense.

FINANCIAL STATEMENTS OF SOLE PROPRIETORSHIPS

After the effect of the individual transactions has 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.

The major financial statements used to communicate accounting information about a business
are:
- income statement
- balance sheet
- statement of owner’s Equity
- statement of cash flows (will be discussed in senior courses)

Since these financial statements are in a sense the end products of the accounting process, a
student who acquires a clear under standing of the content and meaning of financial
statements will be in an excellent position to appreciate the purpose of the earlier steps of
recording and classifying business transactions.

The Income Statement

The income 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

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year. In accounting profitability is measured for a period of time than on a daily basis.
Though measuring daily could be possible, it will not be practical and beneficial to the
business enterprise.
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.

The following is an income statement for Effective Garage for the month ended September
30, 200x.

Effective Garage
Income statement
For the Month Ended September 30,200x

Revenues:
Service Fee Birr 30,000.00
Expenses:
Salary Expense Birr 10,000.00
Telephone Expense 3,000.00
Rent Expense 1,500.00
Advertising Expense 500.00
Total Expenses 15,000.00
Net Income Birr 15,000.00

Owner’s Equity Statement

This is a statement that summarizes the changes in owner’s equity for a specific period of
time. Data for the preparation of owner’s equity statement are obtained from the owner’s
equity column of the tabular summary (Illustration 1- ) and from the income statement. The
heading of this statement identifies the company, the type of statement, and the time period
covered by the statement. The time period is the same as that covered by the income
statement and therefore is dated “ For the Month Ended September 30, 200x.” The beginning
owner’s equity amount is shown on the first line of the statement. Then, the owner’s
investments, net income and the owner’s drawings are identified in the statement.

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The Owner’s equity statement for effective Garage for the month of September is shown
below:
Effective Garage
Statement of Owner’s Equity
For the Month ended September 30,200x

Dawit G. Capital, September 1……………………………………Birr -0-

Add: Investments…………………………………Birr 100,000.00
Net income……………………………………15,000.00
income……………………………………15,000.00 115,000.00
115,000.00
Less: Drawings………………………………………………………………3,000.00
Drawings………………………………………………………………3,000.00
Dawit G. Capital, September 30………………………………… Birr 112,000.00

Balance Sheet

The balance sheet, sometimes called the statement of financial Position, lists the company’s
assets, liabilities and owner’s equity as of a specific date- usually at the end of a month or
year.

Shown below is the balance sheet for Effective Garage as of September 30, 200x. The
balance sheet heading contains the name of the company, the type of statement, and the
specific date on which assets; liabilities and owner’s equity are identified and measured.

The total assets must equal the total liabilities and owner’s equity. There are tow commonly
used formats of the balance sheet:

The account format

Which lists assets on the left side and equities (i.e. liability and owner’s equity) on the right
side. It resembles a basic accounting format called an ‘account’ to be introduced in unit 2.
_________
_________
_____
Assets Liability

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 Owner’s Equity

The Report Format

-Lists assets, Liability and Owner’s equity vertically

__________
_________
_____

Assets

Liability

Owner’s Equity

You can choose either of the two formats for your balance sheet preparation.

The following is a balance sheet prepared for effective Garage based on the sample
transactions illustrated in the chapter.

Effective Garage
Balance Sheet
September 30,200x

Assets Liability
Cash…………Birr 90,500.00 Accounts payable…… Birr 1,000.00
Supplies……………2,500.00
Land………………20,000.00 Owner’s Equity
Ato Dawit Gem., Capital Br12,000.00
Br12,000.00..
_________ Total Liabilities and
Total Assets……..113,000.00
Assets……..113,000.00 Owner’s equity……...Birr 113,000.00

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The double line is drawn only when the total assets on the left side are equal to total liabilities
and Owner’s equity. In the Effective Garage illustration, only one liability- accounts payable-
is reported on the balance sheet. In most cases, there will be more than one liability. When
two or more liabilities are involved, a customary way of listing is as follows:

Liabilities
Notes payable Birr 10,000.00
Accounts Payable 1,000.00
Salaries Payable 2,000.00
Total Liabilities Birr 13,000.00

Each statement provides management, owners, and other interested parties with relevant
financial data. The financial statements are interrelated: (1) Net income of Birr. 15,000
shown on the income statement is added to the beginning balance of owner’s capital in the
owner’s equity statement. (2) Owner’s capital of Birr 112,000 at the end of the reporting
period shown in the Owner’s equity statement is reported on the balance sheet as the Dawit
G/M. capital balance.

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