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FINANCIAL
STATEMENTS
i.
Trading account determines the Profit and Loss
ii.
Profit and Loss account determines the Net Profit. Generally the
two are referred to as: The Income Statement.
iii.
Balance Sheet - These are final accounts showing financial
performance and the state of financial position of an organization. They
usually list assets and liabilities including capital.
ITEMS IN THE BALANCE SHEET
ASSETS:
A. Current
assets
B. Non current assets
LIABILITIES:
A. Current
liabilities
B. Non current
liabilities
FORMAT OF THE BALANCE SHEET
The International Accounting Standard
(1AS1) recommends the following accounting equation when preparing the
balance sheet:
Assets = Capital +
Liabilities
In
vertical format:
A
=
C
+
L
CLASSIFICATION OF EXPENSES
1. - Selling and
distribution
2. - Administration
3. - Finance costs
RELATIONSHIP BETWEEN
THE INCOME STATEMENT AND THE BALANCE SHEET
- Balance
sheets are pictures of the business at particular point in time, thus
closing balances while
- Income
statements show the activities of the business in between those balance
sheet dates.
EXERCISE
On
31 December 20X3 Mungo, a wholesaler, had the following details in his books.
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K
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Opening inventory
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5,000
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Sales
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25,000
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Purchases returns
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2,000
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Discount allowed
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300
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Returns inwards
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500
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Salaries and wages
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8,000
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Discount received
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250
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Rent
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400
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Electricity
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100
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Carriage inwards
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50
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Bad debts
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75
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Postage & stationery
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80
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Carriage outwards
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95
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Closing inventory
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3,000
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Purchases
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12,000
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From
the above information prepare the income statement for the year ended
31
December 20X3.
ACTIVITY 3.7
Mr. Buju, has been in business
for some time now, as a timber merchant. The information below has been
extracted from his books as at 30 June 20X4, the end of the accounting
period.
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K
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Capital at start 1 July 20X3
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121,900
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Trade payables
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19,000
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Sales
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280,000
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Returns outwards
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13,000
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Discounts allowed
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2,000
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Discounts received
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1,500
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Fixtures and fittings @ cost
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120,000
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Depreciation fixtures &
fittings
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12,000
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Trade receivables
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24,000
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Inventory 1 July 20X3
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50,000
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Purchases
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135,000
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Returns inwards
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5,000
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Carriage outwards
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4,000
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Drawings
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18,000
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Carriage inwards
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11,000
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Rent
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7,000
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Rates
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8,000
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Insurance
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10,000
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Heating & lighting
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12,000
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Postage
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500
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Stationery
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700
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Telephone
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400
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Advertising
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5,000
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Salaries & wages
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35,000
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Bad debts
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1,500
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Cash in bank
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6,000
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Cash in hand
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300
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5 year loan from Banda
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20,000
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Inventory at 30 June 20X4
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17,000
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Required:
Prepare
income statement for the year end 30 June 20X3
and a Balance Sheet as of
that date.
CHAPTER SUMMARY
i.
Financial statements are classified into Income Statement and
Balance Sheet.
ii.
A balance sheet shows the financial position of a business.
iii.
The income statement shows in detail how the profit or loss in
an accounting period arises.
iv.
A distinction is made in the balance sheet between non-current
liabilities and current liabilities and between non-current assets and
current assets.
v.
Capital is what the business owes to the owner
vi.
Current means within the
coming one year from the balance sheet date. Current assets are expected to
be converted into cash within one year. Current liabilities are debts payable
within one year.
vii.
The working capital of a business is the difference between its
current assets and current liabilities.
viii.
The income statement is divided between Gross profit and Net
profit.
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