Financial Accounting for Decision Makers

reporting period
, 
but it is sometimes called the ‘accounting period’ or ‘financial period’.
Determining the length of the reporting period will involve weighing up the costs of produc-
ing the information against the perceived benefits of having that information for decision-
making purposes. In practice, the reporting period will vary between businesses; it could be 
monthly, quarterly, half-yearly or annually. For external reporting purposes, an annual report-
ing period is the norm (although certain businesses, typically larger ones, report more fre-
quently than this). For internal reporting purposes to managers, however, more frequent 
(perhaps monthly) financial statements are likely to be prepared.
THE EFFECT OF TRADING TRANSACTIONS
In the example (Jerry and Company), we showed how various types of transactions affected 
the statement of financial position. However, one very important type of transaction – trading 
transactions – has yet to be considered. To show how this type of transaction affects the 
statement of financial position, let us return to Jerry and Company.
The statement of financial position that we drew up for Jerry and Company as at 6 March 
was as follows:
Example 2.2 (continued)
Jerry and Company
Statement of financial position as at 6 March
£
ASSETS
Cash at bank
17,000
Motor van
5,000
Inventories
3,000
Total assets
25,000
EQUITY AND LIABILITIES
Equity
10,000
Liabilities – borrowing
12,000
Liabilities – trade payable
3,000
Total equity and liabilities
25,000
➔
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CHAPTER 2
MEASURING AND REPORTING FINANCIAL POSITION
We can see that the inventories (£3,000) have now disappeared from the statement of 
financial position, but the cash at bank has increased by the selling price of the inventories 
(£5,000). The net effect has therefore been to increase assets by £2,000 (that is, £5,000 less 
£3,000). This increase represents the net increase in wealth (the profit) that has arisen from 
trading. Also note that the equity of the business has increased by £2,000, in line with the 
increase in assets. This increase in equity reflects the fact that wealth generated, as a result 
of trading or other operations, will be to the benefit of the owners and will increase their stake 
in the business.
On 7 March, the business managed to sell all of the inventories for £5,000 and received a 
cheque immediately from the customer for this amount. The statement of financial posi-
tion on 7 March, after this transaction has taken place, will be: