Financial Accounting for Decision Makers

How much wealth (that is, profit) was generated by the business during Monday?
An 
income statement
can be prepared to show the wealth generated (profit) on Monday. 
The wealth generated arises from trading and will be the difference between the value of the 
sales made and the cost of the goods (that is, wrapping paper) sold.
Note that it is only the cost of the wrapping paper 
sold
that is matched against (and 
deducted from) the sales revenue in order to find the profit, not the whole of the cost of 
wrapping paper acquired. Any unsold inventories (also known as 
stock)
will be charged 
against any future sales revenue that it generates. In this case the cost of the unsold 
inventories is 
1
4
of £40
=
£10.
What is the accumulated wealth on Monday evening and what form does it take?
To establish the accumulated wealth at the end of Monday’s trading, we can draw up a 
state-
ment of financial position
for Paul’s business. This statement will also list the forms of wealth 
held at the end of that day.
Note the terms ‘assets’ and ‘equity’ that appear in this statement. ‘Assets’ are business 
resources (things of value to the business) and include cash and inventories. ‘Equity’ is 
the word used in accounting to describe the investment, or stake, of the owner(s) – in this 
case Paul – in the business. Both of these terms will be discussed in some detail a little 
later in this chapter. Note that the equity on Monday evening was £55. This represented 
the £40 that Paul put in to start the business, plus Monday’s profit (£15) – profits belong 
to the owner(s).
Let us now continue by looking at what happens on the following day.
On Tuesday, Paul bought more wrapping paper for £20 cash. He managed to sell all of 
the new inventories and all of the earlier inventories, for a total of £48.