FINANCIAL STATEMENT Learning Objectives 1 Income Statement An

FINANCIAL STATEMENT Learning Objectives 1. Income Statement : An Introduction 2. Balance Sheet 3. Income Statement and Balance Sheet : further considerations P 1 C 1 - 1

FINANCIAL STATEMENT Ø At the end of an accounting period, the owner of a business would want to know the performance of his business. Ø In particular, he wants to know how much profit or losses has been made. Ø To obtain this information, the accountant will prepare financial statements. C 1 - 2

FINANCIAL STATEMENT • Financial statements consists of : Ø Income Statement Ø Balance Sheet • The information required to prepare the financial statement are obtained from the trial balance that has been prepared at the end of the period. C 1 - 3

INCOME STATEMENT • Income Statement is a combined account which shows the performance of the business in making profit or losses over a period of time. • This statement consists of two parts: Ø Trading Account : determine gross profit Ø Profit&loss Account: determine net profit C 1 - 4

1. Purpose of trading and profit and loss accounts • To see how profitably the business is being run. • Trading account – Gross profit is calculated. • Profit and loss account – Net profit is calculated – One account called a trading account, and another called a profit and loss account – Combined together to form on e account called the trading and profit and loss account • These accounts can therefore be seen as part of the double entry system C 1 - 5

2. Trading account • Gross profit is calculated. • Gross profit = Sales – Cost of goods sold • Gross profit = Sales – ( Purchases – Closing stock) C 1 - 6

In Trading Account • Step 1 • Transfer the credit balance of the Sales account to the credit of the Trading account – Dr. Sales account – Cr. Trading account C 1 - 7

• Step 2 • Transfer the debit balance of the Purchases account to the debit of the Trading account. – Dr. Trading account – Cr. Purchases account C 1 - 8

• Step 3 • Remember, in this case there is no stock of unsold goods. This means that: • Purchases = Cost of Goods Sold. • Some of the goods bought (purchases) have not been sold by the end of the accounting period. The record the stock we have entered the following: – Dr. Stock account – Cr. Trading account C 1 - 9

Purchases - Closing Stock = Cost of Goods Sold (what we bought in the period) (Goods bought but not sold in the period) C 1 - 10

• Step 4 • If sales are greater than the cost of goods sold, the difference is gross profit. • If not, the answer would be a gross loss. Sales – Cost of Goods Sold = Gross Profit C 1 - 11

3. Profit and loss account • Net profit is calculated. • Net profit • =Gross profit + income – expenses C 1 - 12

In Profit and Loss Account • Step 1 • Carry this gross profit figure from the Trading account part down to the profit and loss part. – Dr. Trading account – Cr. Profit and Loss account C 1 - 13

• Step 2 • Transfer the debit balances on Expenses accounts to the debit of the Profit and Loss Account. – Dr. Profit and Loss account – Cr. Expenses account C 1 - 14

• Step 3 • Transfer the credit balance on revenue account to the credit side of the profit and loss account. – Dr. Revenue account – Cr. Profit and Loss account C 1 - 15

• Step 4 • Transfer the net profit, when found, to the Capital account to show the increase in capital – Dr. Profit and Loss account – Cr. Capital account Gross Profit – Expenses = Net Profit C 1 - 16

Sales 2005 Dec 31 Trading a/c (2) $ 2005 3, 850 Dec 31 Balance b/d (1) $ 3, 850 L. Sang Trading and Profit and loss account for the year ended 31 Dec 2005 Sales $ 3850 C 1 - 17

Purchases 2005 Dec 31 Balance b/d (3) $ 2005 2, 900 Dec 31 Trading a/c (4) $ 2, 900 L. Sang Trading and Profit and loss account for the year ended 31 Dec 2005 $ Purchases 2900 Sales $ 3850 C 1 - 18

2005 Dec 31 Trading a/c Stock $ 300 L. Sang Trading and Profit and loss account for the year ended 31 Dec 2005 $ Purchases 2900 Less: Closing stock 300 Cost of goods sold 2600 Gross profit c/d 1250 3850 Sales Closing stock $ 3850 300 3850 C 1 - 19

Rent 2005 Dec 31 Balance b/d (6) $ 2005 240 Dec 31 Profit & loss a/c (7) $ 240 L. Sang Trading and Profit and loss account for the year ended 31 Dec 2005 $ Purchases Less: Closing stock Cost of goods sold Gross profit c/d Rent Lighting General expenses Net profit 2900 300 Sales Closing stock 2600 1250 3850 240 150 60 800 1250 $ 3850 300 3850 Gross profit b/d 1250 C 1 - 20

Vertical Style: C 1 - 21

BALANCE SHEET • Balance Sheet is a statement of financial position of a business at a point in time showing what the assets of the business and who are the providers of these resources (Capital & Liabilities) • This statement consists of two parts: Ø Trading Account : determine gross profit Ø Profit&loss Account: determine net profit C 1 - 22

1. The Balance Sheet • It is a statement showing the assets, capital and liabilities of a business at a particular date. • Not part of the double entry system • To list the closing balance on assets, capital and liabilities C 1 - 23

2. Balance Sheet Layout • Assets – Non Current Asset – Current Assets C 1 - 24

Non Current Asset (NCA) • Are of long life • Are to be used in the business, and • Were not bought only for the purpose of resale • NCA are listed starting with those the business will keep the longest, down to those which will not be kept so long. C 1 - 25

Current Assets • Cash in hand, cash at bank, debtors, items held for resale at a profit (i. e. stock) or items that have a short life • These are listed starting with the asset furthest away from being turned into cash, finishing with cash itself C 1 - 26

Long-term Liabilities • Repayable beyond the next accounting year • E. g. Loan, Debentures C 1 - 27

Current Liabilities • Repayable within the next 12 months • E. g. – Creditors – Bank overdraft C 1 - 28

3. Completion of capital account Old Capital + Net Profit – Drawings = New Capital C 1 - 29

4. Format of Balance Sheet • Horizontal Style • Vertical Style C 1 - 30

Horizontal Style C 1 - 31

Vertical Style C 1 - 32

Chapter 9 Income Statement and Balance Sheet : further considerations Learning Objectives 1. Trading and Profit and Loss Account and Balance Sheet : further consideration 2. Adjustment needed for stock 3. Final account P 2 C 1 - 33

Income Statement and Balance Sheet : further considerations • • • Adjustments needed for stock Return inwards Return outwards Carriage inwards Carriage outwards C 1 - 34

Adjustments needed for stock • For new businesses only, they started without stock and therefore had closing stock only • For the second year of trading, to 31 December 2006, both opening stock and closing stock figures will be in the calculations. C 1 - 35

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Stock 2005 $ Jan 1 Bal b/d X 2005 $ Jan 1 Trading a/c X Trading and profit and loss account for the year ended 31 Dec 2005 $ Opening stock Purchase X X Sales $ X C 1 - 37

Return inwards • Return inwards represent goods sold which have now been returned by customer • To keep the actual sales of goods, return inwards is always deducted from sales in the trading account (1) (2) Dr. Return inwards a/c Cr. Debtor Dr. Trading a/c Cr. Return inwards a/c C 1 - 38

2005 $ Dec 31 Bal b/d Return inwards 2005 $ X Dec 31 Trading a/c X Trading and profit and loss account for the year ended 31 Dec 2005 $ Return inwards X Sales Less: Return inwards $ X X X C 1 - 39

Carriage inwards • Carriage inwards is the cost of transport of goods into a business • Suppose one supplier might sell the goods to you for $95, but you would have to pay $5 to a haulage firm for carriage inwards – a total cost of $100 • Cost of buying goods • Carriage inwards is always added to purchases in the trading account. The transfer is made (1) (2) Dr. Carriage inward a/c Cr. Bank Dr. Trading a/c Cr. Carriage inward a/c C 1 - 40

2005 $ Dec 31 Bal b/d Carriage inwards 2005 $ X Dec 31 Trading a/c X Trading and profit and loss account for the year ended 31 Dec 2005 $ Opening stock Purchase Add: Carriage inwards X X X $ Sales Less: Return inwards X X X C 1 - 41

Return outwards • Return outwards represent goods which were purchasing and are now being returned to the supplier • To keep the actual cost of buying goods, return outwards is always deducted from purchases in the trading account (1) (2) Dr. Creditor a/c Cr. Return outward a/c Dr. Return outward a/c Cr. Trading C 1 - 42

Return outwards 2005 $ Dec 31 Trading a/ c X Dec 31 Bal b/d X Trading and profit and loss account for the year ended 31 Dec 2005 $ Opening stock X Purchase Add: Carriage inwards X X Less: Return outwards X $ Sales Less: Return inwards X X X Return outwards X C 1 - 43

Carriage outwards • Carriage outwards is the cost of transport of goods to the customer of a business • This is always treated as an expense to be transferred to the debit of the profit and loss account (1) (2) Dr. Carriage outward a/c Cr. Bank Dr. Profit and loss a/c Cr. Carriage outwards a/c C 1 - 44

2005 $ Dec 31 Bal b/d Carriage outwards 2005 $ X Dec 31 P/L a/c X Trading and profit and loss account for the year ended 31 Dec 2005 $ $ Sales X X X Rent Carriage outwards X Gross profit b/d X X C 1 - 45

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Final Accounts • Final accounts are often used to mean the trading and profit loss account and the balance sheet. C 1 - 48

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