Entrepreneurship & Business Finance

Further Notes 2

Income Statement & Balance Sheet – Computations

1. Computing the opening balance sheet: Case studies often require students to compute
an opening balance sheet. This is a simple exercise, but requires rudimentary knowledge
of assets, liabilities and capital. You are required to read the case and identify the assets
that the entrepreneur commences his operation with. They are then listed according to
categories, that is, current assets and non-current assets. Totals are derived for both
categories and then a grand total for assets calculated.

If the owner has supplied all the assets, then the total assets will equal the owner’s
capital. However, if he started with a loan (liability) then his capital will be total assets
minus the amount for the loan. In the capital & liability (or debt & equity) section of the
balance sheet, the liability and the derived capital will be shown and added together. This
way, both “sides” of your balance sheet will be equal.

2. Computing the sales & purchases log – this is an abbreviated way of preparing a sales
ledger and purchases ledger. However, as this is not a full-fledged accounting course and
many small entrepreneurs do not keep full sets of accounting records, the sales and
purchases log will serve our purpose of computing total purchases and total sales at a
given markup. It is a simple exercise which starts with the quantities of items purchased
and the cost of each item. Multiplying the quantities by their respective price will yield
the total purchases. Multiplying the total purchase price for the items by the given mark
ups will yield the sales value for each item. These are then totaled to give the total sales.

3. Computing the income statement – the income statement is an important report that all
entrepreneurs are interested in. Sometimes referred to as the profit & loss statement, it
provides the owner with information on whether he/she has made a profit or a loss from
operations. It is calculated by taking the total sales from the sales log and subtracting
therefrom the total purchases, also from the sales log. This result in the first of two profits
 calculated by the entrepreneur: The gross profit. From the gross profit, all the business’s
expenses (whether paid for by cash or cheque or still outstanding) are subtracted to arrive
at the net profit, or bottom line.

4. Computing the closing bank and cash balances - this exercise requires you to start
with the opening balances. These would have been stated in the case and should have
been included in your opening balance sheet. To determine the lodgment to your bank a/c
during the trading period, check your total sales (from your sales log). If the case says
“all sales were lodged to your bank a/c” then that figure becomes your lodgment.
However, any amount of your sales which the case says was not lodged must first be
subtracted from your total sales before you use the sales figure as your lodgement to the
bank a/c. The withdrawals from your bank a/c come from two sources, the purchases in
your sales and purchases log and the expenses in your income statement. The case will
say what percentages of purchases and expenses were paid for by ‘cheque’, indicating a
withdrawal from your bank a/c. This is a simple arithmetic process of adding lodgements
to the opening balance and subtracting withdrawals to arrive at the closing balance.
The same process applies to your cash a/c. There are additions to your cash a/c only if
some sales were made for cash. Withdrawals are for either cash purchases or cash
payment of expenses. The case will clearly provide this information.

5. Computing the closing balance sheet – the closing balance sheet follows the same
format of the opening balance sheet except there might be additional items such as
creditors and debtors. Under your current assets, show your calculated closing cash and
bank balances. If a debtor arose, include that amount. You will know this, if the case tells
you that somebody has not paid you for goods you have sold. Include all your assets from
the opening balance sheet whose values have not changed.
Under your capital and liability section, include any creditor that has arisen. Restate the
owner’s capital at the amount you had calculated in the opening balance sheet. The
results of the income statement, that is, the net profit (or loss) must also be included. If it
is a profit it is added to your capital, if it is a loss it is subtracted. Again, the assets “side”
and the capital & liability “side” should be equal.
Categories of accounting transactions

Items Assets Liabilities Capital Income Expenses

Bank √ (CA)
Inventory √ (CA)
Debtors √ (CA)
Motor van √ (NCA)
Creditors √ (CL)
Owner’s input √
Building √ (NCA)
Bank loan √ (NCL)
Unpaid √ (CL)
utilities
Salaries √
Sales/ √
Revenue
General √
expenses

CA = Current Assets
NCA = Non Current Assets
CL = Current Liability
NCL = Non Current Liability