13.

1 – Introduction

- Final financials statements consist of a statement of profit or loss and other

comprehensive income and a statement of financial position. These are
prepared at the end of a business’s accounting period after the trial balance
has been completed. Some business also produces final financials
statements half yearly, quarterly or even monthly.
- Other income earned is added to the gross profit in the statement of profit or
loss of a sole trader.
-
13.2 – The purpose and structure of statements of
profit or loss

- The statement of profit or loss provides a summary of the results of a

business’s trading activities during a given accounting period. It shows the
profit or loss is to enable users of financial statements, such as the owner, to
evaluate the financial performance of a business for a given accounting period
(typically a year). It may be used to determine the amount of taxation on the
profit.
- The statement of profit or loss of a sole trader determines the profit or loss for
the period.
- Chapter 7 ‘ The Accounting Equation and it’s Components’ explained the
profit can be defined as the amount they could be taken out of a business as
drawings in the case of a sole trader or partnership, or is available for
distribution as dividends to shareholders in the case of a company, after main
training the value of the capital of a business. Profit is not the same as an
increase in the amount of money the business possesses. It is the result of
applying certain accounting principles to the transaction of the business.
- Selling and distribution cost include advertising expenditure, the wages of
delivery- van driver, motor expenses including petrol and repairs, and so on.
Administrative expenses usually comprise the salaries of office staff, rent and
rates, light and heat, printing and stationery, telephone and postage, and so
on. The published final financial statements of companies contain a
classification of cots similar to that show above.

- Gross profit = revenue – cost of sales

13.3 – Gross Profit: Inventory and the Cost of Sales

- However, this part of the statement if profit or loss is sometimes presented as

a separate account referred to as the trading account.
- Trading account is prepared to ascertain the gross profit of a sole trader.
- The gross profit for a given period is computed by subtracting the cost of
goods sold/ cost of sales revenue. It is important to appreciate that the cost of
goods sold is not usually the same as the amount of purchases. This is
because most businesses will have purchases goods that are unsold at the
end of the accounting period. These goods are referred to as inventory. The
cost of inventory unsold is carried forward into the next accounting period to
be match against the income that it generates (matching concept), by being
transferred to the statement of financial position at the end of the year.
- The trading account is an account in the
general ledger and is thus a part of the
double – entry system. It is used to
ascertain the gross profit and is prepared
by transferring the balances on the sales
revenue, purchases and returns ledger
accounts to the trading ledger accounts.
In addition, certain entries are required in
respect of inventory. These are as follows:
- Note the inventory at the start of one period will be the inventory at the end of
the previous period. The ledger entries in respect of inventories.
- Statement about the calculation of cost of sales for an entity:
o The cost of goods unsold at the end of the period is deducted from the
costs of sales.
o The cost of goods purchased during the period is added to the cost of
sales.

- The statement of profit or loss is taken from a ledger account in the general
ledger (called profit or loss account) and thus is part of the double – entry
 system. It is used to ascertain the profit (or loss) for the period and is
prepared in the same way as the trading account. That is, the balance on the
income and expenses ledger accounts in the accounts in the general ledger
are transferred to the profit or loss account by mean of double entry.
- Equation for calculating the cost of sales in the statement of profit or loss of a
sole trader:
o Cost of goods in inventory at the start of the period + cost of goods
purchased during the period – cost of goods unsold at the end of the
period

13.4 – the purpose and structure of a statement of

financials position.

- The statement of financial position is a list of the assets, liabilities and capital
of a business at the end of a given accounting period. It therefore provided
information about the resources and
debts of the reporting entity.
- The statement of financials enables
users of financials statements to
evaluate the entities’ financial position, in
particular whether the business is likely
to be able to pay its debts.
1. Non – Current Assets – these are items
not specifically bought for resale but to
be used in the production or distribution
of those gods normally sold by the
business. They are utilized to generate
economic inflows to the entity. Non-
current assets are durable goods that
usually lasts for several years, and
normally kept by a business for more
than one accounting year. Examples of
non – current assets include land and
building, plant and machinery, motor
vehicles, office equipment, furniture, a
fixtures and fittings.
 - In Company financials statements tangible non – current assets are
collectively referred to as ‘property, plant and equipment’ – only one combined
figure would be disclosed in a company statement of financials position.
o Plant, property and equipment are tangible assets.
o Used in long term production.
2. Current Assets - these are items that are normally kept by a business for less
than one accounting year and or support the operating activities of the entity.
Indeed, the composition of each type of current assets is usually continually
changing. Examples include inventories, trade receivables, short term
investments, money in a bank account and cash. [Current Items are those
expected to become due within on accounting year]
3. Equity capital – this refers to the amount of money invested in the business by
owners. This can take the form of cash introduced or profits not withdrawn.
4. Non – current liabilities – these are debts owned by a business that are not
due until after one year (often much longer) from the date of the statement of
financial position. Examples include loans and mortgages.
5. Current Liabilities – these are debts owned by a business that are payable
whin one year (often considerably less) from the date of the statement of
financial position. Examples include payable and bank overdrafts.
- Items included in the total equity and liabilities section of the statement of
financial position of a sole trader, non- current liabilities, current liabilities,
equity capital.

13.5 – Preparing financial statements from the trial balance

- The profit for the period is the difference between the two sides of the profit or
loss account. This is brought down to the credit side of the profit or loss
account and then transferred to the capital account by debating the profit or
loss account and crediting the capital account. The reason for this transfer is
because the profit belongs to the owner and it increases the amount of capital
he or she is entitled to withdraws.
- Capital account is credited in order to transfer the profit in the profit or loss
account of a sole trader to the statement of financial position.
- The balance on the drawings account at the end of the period must be
transferred to the capital account.
- The current assets in the statement of financial position are shown in what is
called their ‘reverse order of liquidity’ the latter refers to how easily assets can
be turned into cash. From the least liquid to most liquid.
- Carriage inwards is added to the cost of purchases because it related to the
haulage costs of goods purchased. Carriage outwards is shown in the
statement of profit or loss account because t related to the haulage costs of
goods sold and is thus selling and distributed expenses.
- Calculations of the balance in the owner’s capital at the end of the year in the
statement of financial position
o Drawing is deducted from the owner’s capital
o Profit for the year is added to owners capital at the beginning of the
year.
- The profit for the year is added to the owners capital at the beginning of the
year.