Financial Statements Income Statement & Statement of Financial Position (Balance Sheet) Mr. BarryA-level Accounting Year 12

Topic Objectives The nature and purpose of:  The income statement  The statement of financial position How to prepare:  The income statement  The statement of financial position Mr. BarryA-level Accounting Year 12

Business Transaction Books of Prime Entry Day books Cash Books Journal Source Documents Ledgers Trial Balance Final Accounts Income Statement Balance Sheet Cash Flow Statement Stages in the Accounting Process Mr. BarryA-level Accounting Year 12

IAS 1 Presentation of Financial Statements “Sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content…” The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows. Mr. BarryA-level Accounting Year 12

IAS1 Context Mr. BarryA-level Accounting Year 12

Purposes of Final Accounts Profit & Loss Account (Income Statement) Owners want to judge performance (profit) Tax purposes Measure growth Judge managements ability to control costs and expenses. Mr. BarryA-level Accounting Year 12

Purposes of Final Accounts Statement of financial position (Balance Sheet) Provides a summery and valuation of business’s assets, liabilities and capital Gives an overall valuation of the business Helps identify liquidity (WC = CA – CL) Identifies sources of funds / level of borrowing v level of owner investment v reserves – CAPITAL STRUCTURE Mr. BarryA-level Accounting Year 12

The Trial Balance is the starting point for the Final Accounts. We will be gain a brief overview of the formats of the final accounts Once we understand the Final Accounts and how they are calculated including the double entry process we will look at more complex adjustments e.g. Accruals and Prepayments, Depreciation and Bad debts written off Mr. BarryA-level Accounting Year 12

Income Statement The Income Statement shows a break-down of how the Gross Profit (a result of the actual trading of the company) and the Net Profit (profits after the running of the business are deducted). Mr. BarryA-level Accounting Year 12

KEY FORMULAE Gross Profit = Sales – Cost of goods sold Cost of Goods sold = (Opening Inventory + Purchases) – closing inventory Net Profit = Gross Profit – Expenses Mr. BarryA-level Accounting Year 12

Mr. BarryA-level Accounting Year 12

Statement of Financial Position The Statement of Financial Position (Balance Sheet) is the second document that a business would produce. This is a snapshot of the assets and liabilities of a business as any one time, hence the ‘as at’ in the title. You need to remember the basic accounting equation: – Assets = Liabilities + Capital Mr. BarryA-level Accounting Year 12

Mr. BarryA-level Accounting Year 12

Balance Sheet (SOFP) (title AS AT...date) The BS is a statement prepared at the end of an accounting period, summarising the capital account of the owner of the business and detailing the ASSETS (owned) and the LIABILITIES (Owed) representing that capital investment on a specific date (like a snapshot). NCA – are intended to be held for more than one year. They are NOT purchased with the intention of being resold, the intention is that they should be held to generate profits for the business from their usage (over and over again, in longer term). CA – are cash or assets that will be turned into cash within the next 12 months. CA’s should be listed in reverse order of LIQUIDITY on the balance sheet, starting with the least liquid to the most liquid (cash). CL – are amounts OWED by the business that have to be repaid in the next 12 months e.g. overdraft, creditors, accruals NCL – are amounts owed by the Co that are not due to be repaid in the next 12 months e.g. mortgages and loans. Capital Account – is the amount of the investment in the business made by the owner. Mr. BarryA-level Accounting Year 12

Create notes on the Trading Account – Page 53 & 54 Mr. BarryA-level Accounting Year 12

Create notes from page 55 Mr. BarryA-level Accounting Year 12

Step by step guide to preparing final accounts from a trial balance 1.Identify on the trial balance items for the trading account, P & L account and the BS and mark these on the trial balance against each heading. 2.Draft a Trading and Profit and Loss account headings 3.Transfer all relevant amounts onto the trading account and calculate the Gross Profit 4.Open the profit and loss account with the GROSS PROFIT brought down from the trading account 5.Transfer all relevant amounts onto the profit and loss account and calculate the net profit or loss 6.Draft all BS headings 7.Transfer all remaining amounts onto the balance sheet. Mr. BarryA-level Accounting Year 12

EXAMINER’S TIPS – TO AVOID COMMON ERRORS 1.The stock shown in the trial balance is the opening stock 2.The closing stock is shown as a separate note after the trial balance and appears on both the Trading account and the BS to complete the double entry. 3.Carriage inwards appears on the trading account, carriage outwards appears in the profit and loss account. Both are expenses (Debit balances) 4.Drawings appear as a deduction from the capital account. They DO NOT appear in the P&L account 5.Discounts received appear AFTER the gross profit 6.Don’t forget to show the complete heading for each of the final accounts, NO abbreviations 7.Show ALL relevant workings.

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The trading and profit and loss account forms part of a business’ double-entry - each amount in this account must have an opposite entry elsewhere When preparing the trading and profit and loss account we are in effect emptying each account that has been storing up a record of business transactions and transferring it to the trading and profit and loss account

Mr. BarryA-level Accounting Year 12