FINAL ACCOUNTS OR FINANCIAL STATEMENTS

 When a person starts business his or her aim is to make profit.

 The profit or loss is calculated in the financial statements which are usually prepared at the
end of the financial year.
 Financial Statements basically consist of two parts:
o An income statement which consist two section :-
 A Trading Account in which gross profit of the business is calculated
 A Profit and Loss account in which the profit for the year, the net profit of
the business is calculated.
 These two are part of double entry system.
o A Statement of Financial Position
 which shows the financial position of the business at a certain date. This is
not part of double entry system.
 Financial statements are usually prepared from a Trial Balance.
 Every item in the Trial Balance appears once in the set of financial statements.
 As each item is used, it is useful to place a tick against the item, this ensures that no item is
overlooked.
 It is common to find notes accompanying a Trial balance about various adjustments which
are made. Any notes to a trial balance are used twice in a set of financial statements.
 To confirm whether a business has made a profit or not, is viable or not, the proprietor has
to calculate the gross profit and the net profit by using the Trading account which shows the
Gross profit and the Profit and Loss account which shows the Net profit.

TRADING ACCOUNT SECTION OF THE INCOME STATEMENT

 Where a business spends its time buying and selling goods it prepares a Trading Account in
which it purchases are st against sales for a given period of time.
 The trading account is used to find out whether the buying and selling activities of the
business are viable or not.
 The purpose of a trading account is to calculate the profit earned on the goods sold which is
known as gross profit.
 The formula for calculating gross profit is

GROSS PROFIT = SELLING PRICE OF GOODS - COST OF SALES

 The selling price represents the total sales less any sales returns (returns inwards).
 Cost of sales represents the total cost of goods actually sold.
 The formula of calculating cost of sales is

COST OF = Opening + Purchases + Closing

SALES inventory Inventory
 The purchases figure represents the total cost of purchases less purchases returns.
 If carriage inwards have been paid on goods purchased this must be added to purchases to
increase the cost of goods purchased.
 If owner of business withdrawn goods for personal use the cost of these goods is credited to
the purchases account, so reducing the cost of goods available for sale.
 If goods taken by the owner must be deducted from the purchases.
 The fomula for calculating net purchases figure is :

Net = Purchases - Purchases + Carriage - Goods for

Purchases returns Inwards own use

The Gross Profit

 The gross profit is the excess of net sales over net purchases
 The Calculation of Gross Profit is shown in the Trading account section of the income
statement
 This must have a heading which includes the period of time covered by the statement.
 IT is also to include the name under which the business trades.

The Net Sales

 Net sales are calculated by deducting sales returns from total sales of the period that is

Net Sales = Total sales - Sales returns

 Direct Expenses
 Direct expenses on purchases that may be incurred especially on imported goods such as
import duty, freight charges, clearing charges, railage and haulage inwards, warehouse
charges and wages paid to workers handling the imported goods directly.
 These are added to the purchases to give the total of purchase.
VERTICAL PRESENTATION OF THE TRADING ACCOUNT

Stephen Pvt Ltd

Trading Account for the year ended 31 December 2020

Sales XXX
Less Sales returns X
Turnover / Net sales XXXXXX

LESS COST OF SALES

Opening Inventory XXXXX
Add Purchases XXXX
Carriage Inwards XXX
Import Duty XX
XXXXXXX
Less Purchases Returns XXX
Goods for own use xxx
Net Purchases XXXXXXX
Cost of goods available for sale Xxxxxxxx
Less Closing inventory Xxxxxx Xxxxxxxx
Cost of goods sold XXXX
GROSS PROFIT

PROFIT AND LOSS ACCOUNT

 The profit and loss account is concerned with profits and losses, gais and expenses.
 Its purpose is to calculate the final profit after all running expenses and other items of
income.
 This is known as the profit for the year or net profit
 The formula for calculating net profit is :-

Net Profit = Gross profit + Other Income - Expenses

Stephen Pvt Ltd
Income Statement Profit and Loss Account for the year ended 31 December 2020

GROSS PROFT XXX

ADD OTHER INCOME
Discount received
Rent received X
Commission received X
Interest earned X
Decrease in provision for doubtful debts x
TOTAL INCOME XXXXXX

LESS OPERATING EXPENSES

Advertising XXXX
Electricity and water XXX
Discount allowed XX
Rent and rates XXX
xxx

Xxxxxxxx
NET PROFIT XXXX

Example
FINANCIAL STATEMENTS

 The financial statements are prepared at the end of each financial year. These consist of an
income statement and a balance sheet.
 A Balance Sheet is a Statement of Financial Position which shows the financial position of the
business at a certain date.
 It shows the assets of business (what the business owns and what is owing to the business)
and the liabilities of a business (what the business owes). The assets show how the
resources are being used and the liabilities show where they come from.
1. ASSETS
o These are resources owned by the business. Assets are divided into two types : -
(a) NON-CURRENT ASSESTS
o These are long term resources or capital goods bought to generate income for the
business and are used for a long period of time.
o Are long term assets bought for use in the business and not for sale, e.g.
tangible assets which includes -premises (land and buildings),
-machinery,
-fixtures and fittings (air conditioner, sockets, plugs)
-equipment,
-furniture (desk chairs desks)
-Motor vehicles.
 In the Statement of financial position, it is usual for the non-current asset to be arranged in
order of permanence. This means that the most permanent assets (asset durability) i.e. how
long they will exist in usable state that can be used in income generating activities, are
shown first as shown above.
(b) CURRENT ASSESTS
o These are short term resources that are quickly converted into cash within one
accounting period. These include:
1. Inventories – these are goods held for sale, use in production or awaiting
further processing.
2. Trade receivable – amounts not yet received from credit customers.
3. Bank- is cash at the bank
4. Cash – is cash held by the business e.g. cash in safe or cash box.
5. Petty cash- is cash held for payment of small value items. E.g. stationery.
6. Prepayments
 In the Statement of financial position, it is usual a current asset to be arranged in increasing
order of liquidity. This means the ease at which asset can be converted in to cash, the
furthest are away from cash are shown first as shown above.

2. LIABILITIES
o These are obligations of the business which have to be paid in the future. Liabilities
can be: -
a. CURRENT LIABILITIES
o These are short term debts of the business.
 o These are obligations of the business which have to be paid for within a financial
year, which is usually 12 months, they include: -
o Trade payables (creditors) – these are customers of the business whose money is
not yet paid. (credit purchase suppliers).
o Bank overdraft – a negative balance (credit) balance on the bank account.
o Other payables Expenses Accrued – amount not yet paid
o Short term loans – which is loan payable within 12 months.
b. NON-CURRENT LIABILITIES
o These are long term debts of the business. They are obligations of a business which
have to be paid after 12months. These include:
 Long term loans e.g. bank loans
 Mortgages – loans with collateral security on properties (building
loans) special loan offered by Building Society for acquisition of immovable
property e.g. house.
 Debentures and loans from individuals
3. CAPITAL
o It is what the owner of the business or proprietor has put or invested into the
business. Also capital is called owner’s equity or capital owned.
o It represents the owner’s investment in the business and is the amount owed by the
business to the owner. e.g. Motor Vehicles, Equipment.
Stephen Pvt Ltd
Statement of Financial Position as at 31 December 2020

ASSETS COST ACCU DEPR NBV

NON CURRENT ASSETS
Land and Building Xxx Xx Xx
Fixtures and fittings Xxx Xx Xx
Office equipment Xxx Xx Xx
Motor Vehicle Xxx Xx Xx
Xxxxx Xxxxx Xxxxxx
Current Assets
Inventory
Xx
Trade receivables
Xx
Bank
Xx
Cash
Xx
xxxxx
XXXXX
EQUITY AND LIABILITIES
Capital Xxxxxx
Add Net Profit Xxxxxx
Xxxxxxx
Less Drawings
xxxxx
Owner’s Equity
xxxxxxxx
Non Current liabilities
Mortage Bond xxxxxxx
xxxxxx
Current liabilities
Trade payable Xxxxxx
 Bank Overdraft Xxx
Owing Xxxx
xxxxxxx
xxxxxxx

CAPITAL STRUCTURE

1. CAPITAL EMPLOYED
These are all assets owned by the business that is Fixed assets + current Assets.
2. CAPITAL OWNED OR OWNER’S EQUITY
These are all the assets less external liabilities
Assets – Long term liabilities + Current Liabilities
Or
Capital + Net Profit – Drawings
3. WORKING CAPITAL
This is the amount which is available to meet day to day expenses of running a business.
Working capital is excess of current assets over current liabilities.
4. Accounting Equation
is given as ASSETS = CAPITAL + LIABILITIES