FINANCIAL STATEMENTS
Financial statements are structured financial presentations of the financial position of an entity as
well as the results of its transactions. The main objective of the financial statements is to provide
information about the financial position and performance of the entity that is useful to the users
in making decisions.
For this purpose,financial statements provides information about the entity’s :-
Income and expenses ,including gains and losses
assets
liabilities
capital.
Basic set of financial statements includes:-
Profit and loss account (income statement)
Balance sheet (Statement of financial position)
The trial balance forms the bridge between bookkeeping and preparation of financial
statement.
FINAL ACCOUNTS FOR SOLE TRADERS
(a) TRADING ACCOUNT
The trading account summarises the trading activities (sale and purchase of goods/stocks) of the
business and tries to determine the gross profit for the relevant financial period. The gross profit
is then taken up in income statement or the profit and loss account as part of the income.
Format for the trading account:
Name
Trading Account for the year ended 31 Dec.
₤ ₤
Sales XX
Less: Returns Inwards (XX)
XXX
Less: Cost of Sales
Opening stock XX
Purchases XX
Add: Carriage Inwards XX
Less: Returns Outwards XX (XX)
Cost of stock available for sale XXX
Less: Closing stock ( XX)
Gross Profit XXX
(
Illustration 1
From the following details draw up the trading account of Savanna for the year ended 31
December 2020, which was his first year in business.
₤
Carriage inwards 6,700
Returns outwards 4,950
Returns inwards 8,900
Sales 387,420
Purchases 333,330
Stock of goods: 31 December 2020 74,890
SAVANNA
Trading Account for the year ended 31 Dec 2020
£ £
Sales 387,420
Less: Returns Inwards 8,900
378,520
Less cost of sales
Purchases 333,330
Add: Carriage Inwards 6,700
340,030
Less: Returns outwards 4,950
335,080
Less: Closing stock 74,890 260,190
Gross Profit 118,330
Illustration 2
The following details for the year ended 31 March 2020 are available. Draw up the trading
account of R Sings for that year.
£
Stocks: 1 April 2019 16,523
Returns inwards 1,372
Returns outwards 2,896
Purchases 53,397
Carriage inwards 1,122
Sales 94,600
Stocks: 31 March 2020 14323
(b) PROFIT AND LOSS ACCOUNT(INCOME STATEMENT)
It shows the net profit or net loss that the business has made from all the activities during a
financial period.
The net profit (or loss) is determined by deducting all the expenses from all the incomes of the
same financial period.
In practice, the trading account is combined together with the net profit and loss account into one
report so that the format is as shown below:
Profit/Loss=Sales revenue-Cost of sales-Expenses
Gross Profit
This is the difference between sales revenue and cost of sales. It is also known as trading profit.
The part of the statement that derives the gross profit is known as trading account.
The Net Profit
This is calculated in the profit and loss account and is what remains after all other costs used up
in the period have been deducted from the gross profit. It is common for the trading and the
profit and loss accounts to be presented as one statement, the trading account being the top
section and the profit and loss account being the lower section.
Name
INCOME STATEMENT
FOR THE YEAR ENDED 2020
£ £
Sales xx
Less: Cost of sales
Opening stock XX
Purchases XX
Less: Closing stock (XX) XX
Gross Profit XX
Add incomes:-
Discount received XX
Rent received XX
Interest received XX
Other incomes XX
XXX
Less: Expenses
Carriage Outwards XX
Discounts allowed XX
Postage & stationary XX
Salaries & wages XX
Rent paid XX
Insurance & rates XX
Bank charges XX
Other expenses XX (XX)
Net profit/ (loss) XX/(XX)
ILLUSTRATION 1
The trial balance extracted from the books of Ms. Joy’s business as at 31/12/2020 is as follows:
DR CR
sh ‘000’ sh.’000’
Motor vehicles 3,000
Furniture and fittings 2,000
Inventory (1/1/2020) 1,000
Sales 10,000
Purchases 6,000
Rent 500
Electricity 500
Salaries and wages 200
Stationery 300
Debtors 1,000
Creditors 2,000
Capital (1/1/2020) 2,500
14,500 14,500
The closing inventory as at 31/12.2020 amounted to sh.1, 500,000.
Required:
Draw the income statement for the year ended 31/12/2020 and the statement of financial position
as at the date.
IIIUSTRATION 3 (Attempt the question)
Mr.Gupta’s trial balance as at 31/12/2020 is as follows:-
DR. CR.
sh“000” sh“000”
Land and buildings 5000
Inventory (1/2/2020) 2,000
Debtors 3,000
Creditors 2,000
Salaries and Wages 1,000
Rent 500
Transportation 1,200
Electricity 500
Purchases 7,000
Sales 14,000
Capital 4,200
20,200 20,200
Inventory as at 31/12/2020 amounted to sh 1,500,000.
Required:-Draw the income ststement for the year ended 31/12/2020 and the balance sheet as at
31/12/2020.
BALANCE SHEET
Balance sheet shows the resources that remain at end of the period and available for use in the next
period(s).It also shows claims to those resources that remain unpaid at the end of the period and
difference which is capital presented in the various forms it is constituted. This is a simple report that
shows the assets and liabilities of the business and the capital of the owner as at a certain point in time
Resources are described as assets. Assets can be either fixed/non-current asset. On-current assets are
those assets that are acquired for use over a long period of time. They Include Land, buildings, motor
vehicles etc
The format is at shown below:
Name
Balance sheet as at 31/Dec/20X
$ $
Non Current Assets
Land & Buildings XX
Plant & Machinery XX
Fixtures, Furniture & Fittings XX
Motor vehicles XX
XXX
Current Assets
Stock/inventories XX
Debtors /Receivables XX
Cash at bank XX
Cash at hand XX XXX
Current Liabilities
Bank overdraft XX
Creditors /Payables XX (XXX)
XXX
Net Assets
Capital XX
Add: Net profit XX
XX
Less: Drawings ( XX)
Non-Current Liabilities
Loan (s) XX
XXX
ADJUSTMENTS IN THE FINAL ACCOUNTS /FINANCIAL STATEMENTS.
Items to be adjusted in the preparation of financial statements are:
Carriage inwards and carriage outwards
Bad debt/provision for bad debts
Return inwards/return outwards
Accruals/prepayments
Depreciation
Provision for depreciation
Drawings
Carriage inwards and carriage outwards
A business may incur the cost of bringing goods bought to its premises. This is a separate cost
from other transport cost and is described as carriage –inwards. Carriage inwards is associated
with purchases of goods, therefore is added in the computation of cost of sales. Business may
incur transport expenses for distributing goods sold to its customers. It is described as carriage
outwards and is charged directly to the income statement as an expense.
BAD DEBT
A debt owed to business that is not expected to be received. Instances in which debts are
declared bad debts (uncollectible) are:Bad debts are those debts that the business is not able to
collect.These are written off as an expense.
The customer in question dies and there’s nothing to recover from his estate.
If the customer is declared bankrupt and nothing is recovered from any of his property
If the customer becomes insane and the property can be attached.
PROVISION FOR BAD AND DOUBTFUL DEBTS
Some debtors may not qualify to be bad but their collection may be in doubt. These
may include debtors that have taken longer than the normal/agreed credit period
It may also include debts held by people whose ability to pay is in doubt. Prudence
requires that such debts be set aside as doubtful. A provision for bad and doubtful
debts is set, at the end of the period. It is compared with the amount of provision set
in the previous period. If there is an increase then such increase is charged to profit
and loss account/income statement as an expense. If it is a decrease, then the decrease
amount is a credit to income statement
In the balance sheet, provision for bad and doubtful debts at the end of the year is
deducted from debtors figure.
The determination of the amount of provision for bad and doubtful debts is a matter of
policy and may vary from one firm to the other. Some of the methods that may be used
are:
Debt ageing analysis
Percentage of credit sales
Percentage of debt outstanding
ILLUSTRATION 3
From the following trial balance of P Mikes draw up Income Statement account for the year
ended 30 September 2020, and Statement of Financial Position as at that date.
Dr Cr
£ £
Stock 1 October 2019 23,680
Carriage outwards 2,000
Carriage inwards 3,100
Returns inwards 2,050
Returns outwards 3,220
Purchases 118,740
Sales 186,000
Salaries and wages 38,620
Rent 3,040
Insurance 780
Motor expenses 6,640
Office expenses 2,160
Lighting and heating expenses 1,660
General expenses 3,140
Premises 50,000
Motor vehicles 18,000
Fixtures and fittings 3,500
Debtors 38,960
Creditors 17,310
Cash at bank 4,820
Drawings 12,000
Capital 126,360
332,890 332,890
BALANCE SHEET
Balance sheet shows the resources that remain at end of the period and available for use in the
next period(s).It also shows claims to those resources that remain unpaid at the end of the period
and difference which is capital presented in the various forms it is constituted. This is a simple
report that shows the assets and liabilities of the business and the capital of the owner as at a
certain point in time
Resources are described as assets. Assets can be either fixed/non-current asset. On-current assets
are those assets that are acquired for use over a long period of time. They Include Land,
buildings, motor vehicles etc
The format is at shown below:
Name
Balance sheet as at 31/Dec/20X
$ $
Non Current Assets
Land & Buildings XX
Plant & Machinery XX
Fixtures, Furniture & Fittings XX
Motor vehicles XX
XXX
Current Assets
Stock/inventories XX
Debtors /Receivables XX
Cash at bank XX
Cash at hand XX XXX
Current Liabilities
Bank overdraft XX
Creditors /Payables XX (XXX)
XXX
Net Assets
Capital XX
Add: Net profit XX
XX
Less: Drawings (XX)
Non-Current Liabilities
Loan (s) XX
XXX
