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FINANCIAL STATEMENTS/FINAL ACCOUNTS

At the end of the topic, the student should be able to:

 State the purpose of preparing the Statement of comprehensive income

 Define and calculate ‘cost of goods sold’
 Define ‘gross profit’ and ‘net profit’
 Prepare simple Statement of comprehensive income showing clearly :
 Turnover
 Cost of sales
 Gross profit
 Operating expenses
 Net Profit

Introduction

 Now that most of the bookkeeping tasks have been learnt, we move on to reporting part of the
course. The accountant needs to report to the owners of the business periodically and
reporting is by preparing of Financial Statements.
 These are made up of the statement of comprehensive income(known as income statement
or profit and loss account) and Statement of Financial of financial position(Balance sheet)

Financial statements are prepared for the following reasons:

 For the purpose of computing government tax,

 It is a requirement by the government,
 To show the financial position of the business,
 To show the financial performance of the business,

Statement of Comprehensive income

The income statement is a statement that is prepared to show the profitability of the business. The
owners need to know whether their business is making some profit or loss making. This knowledge
will help them to make appropriate decisions concerning their investment

The income statement is prepared for the following reasons:

 To measure the performance of the business,

 To calculate net profit or loss for the period,
 For comparisons

The income statement comprises of two sections namely the:

 Trading account
 Profit and loss account

Trading account

This section compares the revenue or sales made against the cost incurred in earning the revenue
before accounting for operational expenses. It is used to calculate gross profit or gross loss
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TRADING ACCOUNT FORMAT

Kembo’s Trading account for the year ended 31 December 20XX

$ $ $

Sales/Revenue XXX
less Sales return/Return inwards XXX

Net sales/ Turnover XXX

Less Cost of goods sold/Cost of sales

Opening inventory /stock XXX
add Purchases XXX
add Import duty/Custom duty XXX
add carriage inwards XXX
XXX
Less Purchases returns/Return Outwards (XXX) XXX

Cost of goods available for sale XXX

less closing inventory ( XXX) (XXX)
Gross Profit /loss XXX

Cost of goods sold

 This is the value of goods sold. It is found by adding opening inventory to net purchases and
then deducting inventory at hand on the last day of the business.

Opening inventory (Opening stock)

 Refers to goods which remained unsold for the previous accounting period.

Closing inventory (Closing stock)

 Refers to goods not sold by the end of the current accounting year

Gross Profit

 This is the excess of turnover to cost of goods sold. If the cost of goods sold is more than
turnover, the result is gross loss

Carriage inwards

 the cost of transporting goods from suppliers into the business

Carriage outwards

 The cost of transporting goods from the business to customers

Import duty/custom duty

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 it is a tax levied on goods imported into a country. Import duty is treated as an expense

Statement of Comprehensive lncome

 Profit and loss account is the section of the income statement where net profit or net loss is
calculated. This is done by deducting total expenses from gross income and other income.
 If total income exceeds total expenses the results is net profit. Net loss happens when
expenses exceeds the income

Kembo’s Statement of Comprehensive income for the year ended 31 December 20XX

$ $ $

Sales/Revenue XXX
less Sales return/Return inwards XXX

Net sales/ Turnover XXX

Less Cost of goods sold/Cost of sales

Opening inventory /stock XXX
add Purchases XXX
add Import duty/Custom duty XXX
add carriage inwards XXX
XXX
Less Purchases returns/Return Outwards (XXX) XXX

Cost of goods available for sale XXX

less closing inventory/Stock ( XXX ) (XXX)

Gross Profit /loss XXX

add other income:

add rent received XXX
add commission received XXX
add bad debts recovered XXX
add decrease in provision for bad debts XXX
add interest received XXX
add discount received XXX
add profit on sale of vehicle XXX
XXX

Less Trading expenses/operating expenses

Rent XXX

Advertising XXX
Rent and rates XXX
Carriage outwards XXX
Wages and Salaries XXX
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discount allowed XXX

interest paid XXX
Depreciation XXX
Administration expenses XXX (XXX)
NET LOSS/PROFIT XXX/(XXX)

STATEMENT OF FINANCIAL POSITION/ BALANCE SHEET

The statement of financial position is prepared to show the financial position of the business. The
financial position shows the status of the business’s resources and how they have been funded. Both
non-current and current resources are listed. The sources of funds in the form of capital, non-current
and current liabilities are also shown. According to the accounting equation, the two should balance

Remember the accounting equation

ASSETS= CAPITAL (EQUITY/OWNER’S EQUITY) + LIABILITIES or

ASSETS – LIABILITIES = CAPITAL (EQUITY/OWNER’S EQUIY)

The purpose of a statement of financial position

 To show what the owner invested in the business,

 To show the assets and liabilities of the business,
 To show the financial position of the business,
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Statement of financial position format

Statement of financial position of A.Moyo as at 31 January 2XXX

Non-current assets/ fixed assets COST ACC DPN NETBOOK VLE

$ $ $

land and buildings X X X

Motor vehicles X X X
Machinery X X X
Premises X X X
Office furniture X X X
Fittings and fixtures X X X

X X X

Current Assets
Inventory/Stock X
Trade receivables/Trade debtors X
other receivables X
Cash X
Bank X
Prepayments X X

Total assets X

Equity and liabilities

Financed by:
Opening Capital X
add Net profit/ less Net loss X(X)
X
Less Drawings (X)
Closing capital X
add Current liabilities
Trade payables/Trade creditors X
Owings X
bank overdraft X
Overdrafts X
short-term borrowings X X

X
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Non-current Liabilities
Mortgages X

Statement of financial position of A.Moyo as at 31 January 2XXX

Non-current assets/ fixed assets COST ACC DPN NETBOOK VLE

$ $ $

land and buildings X X X

Motor vehicles X X X
Machinery X X X
Premises X X X
Office furniture X X X
Fittings and fixtures X X X

X X X

Current Assets
Inventory/Stock X
Trade receivables/Trade debtors X
other receivables X
Cash X
Bank X
Prepayments X X

Less Current liabilities

Trade payables/Trade creditors X
other trade payables X
bank overdraft X
Overdrafts X

X
X

Non-current liabilities
Mortgages X

X
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Equity
Opening capital X
Net loss/Loss X (X)

Less Drawings X

Closing capital X

Components of the statement of financial position

Equity

 Equity is made up of opening capital plus net profit (net loss is deducted)
and then drawings are deducted

Non- current assets

 These are written in their order of durability or permanency

Current assets

 These are written in their order of liquidity.

Current liabilities

 These are amounts we owe but should be paid off within the next accounting period. e.g
payables, amounts owed to suppliers and bank overdrafts

Non-current liabilities

 These are amounts owed to outsiders but will be paid after next accounting period. Examples
include bank loans payable after more than 12 months.
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