The Trading and Profit and Loss Account and the Balance Sheet

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Presentation transcript:

The Trading and Profit and Loss Account and the Balance Sheet 20/04/2017 The Trading and Profit and Loss Account and the Balance Sheet Volume 1 Chapters 8 - 10

What’s Inside ? Learning Objectives uiz Corner hink Corner Net purchases and net sales Trading and profit and loss account Capital account 1 2 Departmental accounts uiz Corner Trading account Trading and profit and loss account

Learning Objectives After reading this chapter, you will be able to:  Describe the flow of preparing final accounts.  Prepare the trading account and calculate the cost of goods sold and gross profit or gross loss.  Prepare the trading account with appropriate adjustments for sales and for items affecting the cost of goods sold.  Prepare the profit and loss account and calculate the net profit or net loss.  Prepare the trading and profit and loss account.

Learning Objectives After reading this chapter, you will be able to:  Balance off the capital account at the year end.  Draw up the balance sheet and put relevant account balances under appropriate headings.  Prepare the final accounts in vertical format.  Prepare departmental accounts for companies having several departments.  Prepare a profit and loss account for a business in the service sector that is not trading in goods.

Flow of preparing final accounts When business transactions occur, we need to enter these transactions into _______. accounts At the end of each month, the accounts need to be _____ to have an overview of the business. closed At the end of the financial year, the accounts need to be closed to prepare the ___________. final accounts A __________ needs to be drawn up before the final accounts are prepared. trial balance A _____________ and a ___________________ are prepared to calculate the profit or loss made by the firm. trading account profit and loss account The ______ account needs to be closed by transferring the net profit / loss and the drawings against it. capital A ___________ can then be drawn up. balance sheet Learning Objectives

Trading account and cost of goods sold A trading account is an account in which __________ or ________ is calculated. gross profit gross loss Gross profit is the excess of ____ over the _______ _________ for the period. sales cost of goods sold Gross loss is the excess of _______________ over ____ for the period. cost of goods sold sales Gross profit = Sales – Cost of goods sold Gross loss = Cost of goods sold – Sales Trading account is a double entry account where the left-hand side is the _________ and the right-hand side is the _________. debit side credit side

Trading account and cost of goods sold At the end of a financial year, businesses usually have unsold goods; we call this __________. An annual _________ is usually held at the end of a financial year to ascertain the value of closing stock. closing stock stocktaking Closing stock is carried forward to the next financial year; we call this the ___________. opening stock A ____ account is opened to record closing stock and opening stock. stock Cost of = Opening stock + Purchases – Closing stock goods sold Total stock available Stock remained unsold

Trading account and cost of goods sold Example 1: Flora Company’s financial year ended on 31 December 20X8. Here is the information extracted from her books: $ Sales 100,000 Purchases 60,000 Opening stock 8,000 Closing stock 10,000 The steps for preparing the trading account are as follows:

Trading account and cost of goods sold tep Close the sales account and transfer the credit balance to the trading account. Dec 31 Total for the year 100,000 20X8 $ Sales Dec 31 Trading 100,000 $ Trading Sales 100,000

Trading account and cost of goods sold tep Close the purchases account and transfer the debit balance to the trading account. Dec 31 Total for the year 60,000 20X8 $ Purchases Dec 31 Trading 60,000 Sales 100,000 $ Trading Purchases 60,000

Trading account and cost of goods sold Calculate the cost of goods sold by transferring the opening and closing stock from the stock account to the trading account. tep Jan 1 Balance b/f 8,000 20X8 $ Stock Dec 31 Trading 8,000 Dec 31 Trading 10,000 “ 31 Balance c/f 10,000 18,000 Sales 100,000 $ Trading Purchases 60,000 Opening stock 8,000 Closing stock 10,000

Trading account and cost of goods sold tep Balance off the trading account and transfer the balance to the profit and loss account. Purchases 60,000 Sales 100,000 $ Trading Opening stock 8,000 Closing stock 10,000 Gross profit 42,000 110,000 Transferred to the profit and loss account

Trading account and cost of goods sold Example 2: On 31 December 20X7, Panda Company had the following account balances: $ Sales 70,000 Purchases 80,000 Opening stock 4,000 Closing stock 5,000 The accounts would be closed as follows:

Trading account and cost of goods sold Dec 31 Total for the year 70,000 20X7 $ Sales Dec 31 Trading 70,000 Dec 31 Total for the year 80,000 20X7 $ Purchases Dec 31 Trading 80,000 $ Trading Purchases 80,000 Sales 70,000

the profit and loss account Trading account and cost of goods sold Jan 1 Balance b/f 4,000 20X7 $ Stock Dec 31 Trading 4,000 Dec 31 Trading 5,000 “ 31 Balance c/f 5,000 9,000 Purchases 80,000 Sales 70,000 $ Trading Opening stock 4,000 Closing stock 5,000 Gross loss 9,000 84,000 Transferred to the profit and loss account Learning Objectives

hink Corner You have learned that goods may be returned to suppliers or returned from customers. How do these two items affect purchases and sales? Goods returned from customers reduce sales, therefore, the actual sales would be: nswer Net sales = Sales – Returns inwards Goods returned to suppliers reduce purchases, therefore the actual purchases would be: Net purchases = Purchases – Returns outwards Therefore, both returns inwards and returns outwards should be entered in the trading account.

hink Corner You have learned that goods may be returned to suppliers or returned from customers. How do these two items affect purchases and sales? Goods returned from customers reduce sales, therefore, the actual sales would be: nswer Net sales = Sales – Returns inwards Goods returned to suppliers reduce purchases, therefore the actual purchases would be: Net purchases = Purchases – Returns outwards Therefore, both returns inwards and returns outwards should be entered in the trading account.

Trading account and adjustments At the end of the financial year, returns accounts are closed and their balances are transferred to the _____________. trading account Example 3: Assume that the total returns inwards and total returns outwards for Flora Company for the year were $3,000 and $5,000, respectively. Dec 31 Total for the year 3,000 20X8 $ Returns Inwards Dec 31 Trading 3,000 Purchases 60,000 Sales 100,000 $ Trading Opening stock 8,000 Closing stock 10,000 Returns inwards 3,000

Trading account and adjustments Dec 31 Total for the year 5,000 20X8 $ Returns Outwards Dec 31 Trading 5,000 Opening stock 8,000 Purchases 60,000 Sales 100,000 $ Trading Closing stock 10,000 Returns inwards 3,000 Returns outwards 5,000 Gross profit 44,000 115,000 Since returns outwards reduce the amount of purchases, the cost of goods sold = Opening stock + Purchases – Returns outwards – Closing stock Net purchases

Trading account and adjustments Items affecting the cost of goods sold: To calculate the actual cost of goods sold, besides deducting returns outwards from purchases, we should include all _______ that increase the cost of goods. expenses 1. Carriage inwards: This is the cost of delivering goods purchased from suppliers. This cost of delivery _______ the cost of buying goods; thus, it should be included in the cost of goods sold by transferring the balance in the carriage inwards account to the ____________. increases trading account

Trading account and adjustments Items affecting the cost of goods sold: Cost of making goods ready for resale: Some goods may need to be processed before they are sold to customers. This cost of making goods ready for resale ________ the cost of goods sold and should be shown in the ____________. increases trading account Opening stock + Net purchases + Carriage inwards + Cost of making goods ready for resale Closing stock Cost of goods sold

Trading account and adjustments Items affecting the cost of goods sold: Example 4: Assume that Flora Company paid $5,000 for carriage inwards and $4,000 for goods packaging during the year. Dec 31 Total for the year 5,000 20X8 $ Carriage Inwards Dec 31 Trading 5,000 Purchases 60,000 Sales 100,000 Trading Returns inwards 3,000 Opening stock 8,000 $ Closing stock 10,000 Returns outwards 5,000 Carriage inwards 5,000

Trading account and adjustments Dec 31 Total for the year 4,000 20X8 $ Packing Goods Dec 31 Trading 4,000 Purchases 60,000 Sales 100,000 Returns inwards 3,000 Trading Opening stock 8,000 $ Closing stock 10,000 Returns outwards 5,000 Carriage inwards 5,000 Goods packaging 4,000 Gross profit 35,000 115,000 uiz Corner Learning Objectives

uiz Corner Using the following information, prepare a trading account for the year ended 31 December 20X8. $ Sales 55,000 Purchases 41,250 Stock as at 1 January 20X8 11,500 Stock as at 31 December 20X8 10,750 Returns inwards 1,500 Returns outwards 1,200 Carriage inwards 2,100 Goods packaging 2,500

uiz Corner Trading $ Purchases 41,250 Sales 55,000 Opening stock 11,500 Closing stock 10,750 Returns inwards 1,500 Returns outwards 1,200 Carriage inwards 2,100

uiz Corner Trading $ Purchases 41,250 Sales 55,000 Opening stock 11,500 Closing stock 10,750 Returns inwards 1,500 Returns outwards 1,200 Carriage inwards 2,100 Goods packaging 2,500 Gross profit 8,100 66,950

uiz Corner Using the following information, prepare a trading account for the year ended 31 December 20X8. $ Sales 55,000 Purchases 41,250 Stock as at 1 January 20X8 11,500 Stock as at 31 December 20X8 10,750 Returns inwards 1,500 Returns outwards 1,200 Carriage inwards 2,100 Goods packaging 2,500

uiz Corner Trading $ Purchases 41,250 Sales 55,000 Opening stock 11,500 Closing stock 10,750 Returns inwards 1,500 Returns outwards 1,200 Carriage inwards 2,100

uiz Corner Trading $ Purchases 41,250 Sales 55,000 Opening stock 11,500 Closing stock 10,750 Returns inwards 1,500 Returns outwards 1,200 Carriage inwards 2,100 Goods packaging 2,500 Gross profit 8,100 66,950

Profit and loss account A profit and loss account is an account in which ________ or ______ is calculated. All day-to-day running expenses and revenues are entered in this account. net profit net loss Net profit is the excess of ___________________ _______ over _______ for the period. gross profit plus other revenues expenses Net loss is the excess of ________ over the total of __________ and ____________ for the period. expenses gross profit other revenues Net profit = Gross profit + Other revenues – Expenses Net loss = Expenses – Gross profit – Other revenues Profit and loss account is also a _________________ with a debit side and a credit side. double entry account

Commission Receivable Profit and loss account Example 5: Flora Company received a commission of $2,000 and paid salaries amounting to $10,000, electricity amounting to $5,000 and $10,000 in rent during the year. Steps for preparing a profit and loss account are: tep Close the other revenues accounts and transfer the credit balances to the profit and loss account. Dec 31 Total for the year 2,000 20X8 $ Commission Receivable Dec 31 Profit and loss 2,000 Gross profit b/f 35,000 Profit and Loss $ Commission receivable 2,000

Profit and loss account tep Close the expenses accounts and transfer the debit balances to the profit and loss account. Dec 31 Total for the year 10,000 20X8 $ Salaries Dec 31 Profit and loss 10,000 Dec 31 Total for the year 5,000 20X8 $ Electricity Dec 31 Profit and loss 5,000 Gross profit b/f 35,000 Profit and Loss $ Commission receivable 2,000 Salaries 10,000 Electricity 5,000

Profit and loss account Dec 31 Total for the year 10,000 20X8 $ Rent Dec 31 Profit and loss 10,000 Salaries 10,000 Electricity 5,000 Gross profit b/f 35,000 Profit and Loss $ Commission receivable 2,000 Rent 10,000 tep Balance off the profit and loss account. A credit balance represents a net profit and a debit balance represents a net loss. Then, transfer the debit or credit balance to the capital account.

Profit and loss account Rent 10,000 Salaries 10,000 Electricity 5,000 Gross profit b/f 35,000 Profit and Loss $ Commission receivable 2,000 Net profit 12,000 37,000 Transferred to the capital account Note: After the profit and loss account is prepared, the other revenues and expenses accounts are closed and their balances will not be carried forward to the next year.

Profit and loss account Example 6: Assume that the electricity paid by Flora Company was $20,000, the profit and loss account would appear as: Dec 31 Total for the year 20,000 20X8 $ Electricity Dec 31 Profit and loss 20,000 Gross profit b/f 35,000 Rent 10,000 Salaries 10,000 Profit and Loss $ Commission receivable 2,000 Electricity 20,000 Net loss 3,000 40,000 Transferred to the capital account Learning Objectives

Trading and profit and loss account If the final accounts are to be presented to outsiders like banks, investors and the Inland Revenue Department, we need to combine the trading account and the profit and loss account into one, called the ____________________________. trading and profit and loss account The format of the trading and profit and loss account is similar to that of the trading account and the profit and loss account; only a few changes are made to make the account more _________ and easier to _________. informative understand When the two accounts are combined, it is described as a ________________. The ____ of the company and the ______________ are shown. financial statement name period concerned Example 7: Using the information in Examples 4 and 5, the trading and profit and loss account for Flora Company would appear as:

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 Name of the company 55,000 Add Carriage inwards 5,000 Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 97,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000 37,000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 55,000 Add Carriage inwards 5,000 Period concerned Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 97,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000 37,000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 55,000 Add Carriage inwards 5,000 Net sales Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 97,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000 37,000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 Net purchases 55,000 Add Carriage inwards 5,000 Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 97,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000 37,000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 55,000 Add Carriage inwards 5,000 Total cost of goods purchased for the year Goods packaging 4,000 64,000 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 97,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000 37,000

Trading and profit and loss account Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Opening stock 8,000 Sales 100,000 Purchases 60,000 Less Returns inwards 3,000 Less Returns outwards 5,000 97,000 55,000 Add Carriage inwards 5,000 Goods packaging 4,000 64,000 Total goods available for sale for the year 72,000 Less Closing stock 10,000 Cost of goods sold 62,000 Gross profit c/d 35,000 97,000 Salaries 10,000 Gross profit b/d 35,000 Electricity 5,000 Commission receivable 2,000 Rent 10,000 Net profit 12,000 37,000

hink Corner What are the differences between the format of the trading and profit and loss account and that of the trading account and the profit and loss account? nswer 1. Returns inwards are put on the credit side and are deducted from sales to get the net sales figure. 2. Returns outwards are put on the debit side as a contra item and are deducted from purchases to get the net purchases figure. 3. Closing stock is deducted from the figure of total cost of goods purchased to get the figure of the cost of goods sold.

hink Corner What are the differences between the format of the trading and profit and loss account and that of the trading account and the profit and loss account? nswer 1. Returns inwards are put on the credit side and are deducted from sales to get the net sales figure. 2. Returns outwards are put on the debit side as a contra item and are deducted from purchases to get the net purchases figure. 3. Closing stock is deducted from the figure of total cost of goods purchased to get the figure of the cost of goods sold.

uiz Corner From the following information, prepare a trading and profit and loss account for Gowell Company for the year ended 31 March 20X7. $ Stock as at 1 April 20X6 16,000 Purchases 66,700 Sales 93,800 Returns inwards 2,500 Returns outwards 2,000

uiz Corner $ Carriage inwards 5,000 Packaging goods for resale 5,000 Stock as at 31 March 20X7 12,000 Rent received 20,000 Wages and salaries 10,000 Insurance 5,000

Trading and Profit and Loss Account for the year ended 31 March 20X7 uiz Corner Gowell Company Trading and Profit and Loss Account for the year ended 31 March 20X7 $ $ $ Opening stock 16,000 Sales 93,800 Purchases 66,700 Less Returns inwards 2,500 Less Returns outwards 2,000 91,300 64,700 Add Carriage inwards 5,000 Packaging 5,000 74,700 Less Closing stock 12,000 62,700 Cost of goods sold 78,700 Gross profit c/d 12,600 91,300 Wages and salaries 10,000 Gross profit b/d 12,600 Rent receivable 20,000

Trading and Profit and Loss Account for the year ended 31 March 20X7 uiz Corner Gowell Company Trading and Profit and Loss Account for the year ended 31 March 20X7 $ $ $ Opening stock 16,000 Sales 93,800 Purchases 66,700 Less Returns inwards 2,500 Less Returns outwards 2,000 91,300 64,700 Add Carriage inwards 5,000 Packaging 5,000 74,700 Less Closing stock 12,000 62,700 Cost of goods sold 78,700 Gross profit c/d 12,600 91,300 Wages and salaries 10,000 Gross profit b/d 12,600 Rent receivable 20,000

Trading and Profit and Loss Account for the year ended 31 March 20X7 uiz Corner Gowell Company Trading and Profit and Loss Account for the year ended 31 March 20X7 $ $ $ Opening stock 16,000 Sales 93,800 Purchases 66,700 Less Returns inwards 2,500 Less Returns outwards 2,000 91,300 64,700 Add Carriage inwards 5,000 Packaging 5,000 74,700 Less Closing stock 12,000 62,700 Cost of goods sold 78,700 Gross profit c/d 12,600 91,300 Wages and salaries 10,000 Gross profit b/d 12,600 Insurance 5,000 Rent receivable 20,000 Net profit 17,600 32,600

uiz Corner Below are the balances extracted from the trial balance of Gowell Company as at 31 March 20X7. Prepare a trading and profit and loss account for Gowell Company for the year ended 31 March 20X7. $ Stock as at 1 April 20X6 16,000 Purchases 66,700 Sales 93,800 Returns inwards 2,500 Returns outwards 2,000

uiz Corner $ Carriage inwards 5,000 Packaging goods for resale 5,000 Stock as at 31 March 20X7 12,000 Rent received 20,000 Wages and salaries 10,000 Insurance 5,000 Learning Objectives

Trading and Profit and Loss Account for the year ended 31 March 20X7 uiz Corner Gowell Company Trading and Profit and Loss Account for the year ended 31 March 20X7 $ $ $ Opening stock 16,000 Sales 93,800 Purchases 66,700 Less Returns inwards 2,500 Less Returns outwards 2,000 91,300 64,700 Add Carriage inwards 5,000 Packaging 5,000 74,700 Less Closing stock 12,000 62,700 Cost of goods sold 78,700 Gross profit c/d 12,600 91,300 Wages and salaries 10,000 Gross profit b/d 12,600 Rent receivable 20,000

Trading and Profit and Loss Account for the year ended 31 March 20X7 uiz Corner Gowell Company Trading and Profit and Loss Account for the year ended 31 March 20X7 $ $ $ Opening stock 16,000 Sales 93,800 Purchases 66,700 Less Returns inwards 2,500 Less Returns outwards 2,000 91,300 64,700 Add Carriage inwards 5,000 Packaging 5,000 74,700 Less Closing stock 12,000 62,700 Cost of goods sold 78,700 Gross profit c/d 12,600 91,300 Wages and salaries 10,000 Gross profit b/d 12,600 Rent receivable 20,000

Trading and Profit and Loss Account for the year ended 31 March 20X7 uiz Corner Gowell Company Trading and Profit and Loss Account for the year ended 31 March 20X7 $ $ $ Opening stock 16,000 Sales 93,800 Purchases 66,700 Less Returns inwards 2,500 Less Returns outwards 2,000 91,300 64,700 Add Carriage inwards 5,000 Packaging 5,000 74,700 Less Closing stock 12,000 62,700 Cost of goods sold 78,700 Gross profit c/d 12,600 91,300 Wages and salaries 10,000 Gross profit b/d 12,600 Insurance 5,000 Rent receivable 20,000 Net profit 17,600 32,600

hink Corner After getting the net profit from the profit and loss account, what should we do? nswer You have learned that profit increases capital and loss decreases capital. After calculating the net profit / net loss, we should transfer the net profit / net loss to the capital account to obtain the updated amount of capital. Old capital + Net profit = New capital Old capital – Net loss = New capital

hink Corner After getting the net profit from the profit and loss acount, what should we do? nswer You have learned that profit increases capital and loss decreases capital. After calculating the net profit/loss, we should transfer the net profit or net loss to the capital account to obtain the updated amount of capital. Old capital + Net profit = New capital Old capital – Net loss = New capital

hink Corner Can you think of any other items which affect the amount of capital? nswer Drawings. Drawings reduce capital and therefore we should transfer the balance of the drawings account to the capital account in order to calculate the amount of new capital at the end of a financial year. Old capital + Net profit – Drawings = New capital Old capital – Net loss – Drawings = New capital

hink Corner Can you think of any other items which affect the amount of capital? nswer Drawings. Drawings reduce capital and therefore we should transfer the balance of the drawings account to the capital account in order to calculate the amount of new capital at the end of a financial year. Old capital + Net profit – Drawings = New capital Old capital – Net loss – Drawings = New capital

Closing the capital account Remember, the balance of capital in the trial balance is the _____________. At the end of the year, we need to close the capital account by transferring the net profit or net loss and the drawings to get the ____________. opening balance closing balance Example 8: Assume that the opening capital balance as at 1 January 20X8 and the drawings for the year ended 31 December 20X8 for Flora Company were $50,000 and $5,000, respectively. The capital account would be closed as follows:

Closing the capital account The steps for closing the capital account are: tep Close the drawings account and transfer the balance to the capital account. Dec 31 Total for the year 5,000 20X8 $ Drawings Dec 31 Capital 5,000 Jan 1 Balance b/f 50,000 20X8 $ Capital Dec 31 Drawings 5,000

Closing the capital account Transfer the net profit or net loss from the profit and loss account to the capital account. tep Balance off the capital account. The balance is carried forward to the next financial year. tep Dec 31 Drawings 5,000 Jan 1 Balance b/f 50,000 20X8 $ Capital “ 31 Balance c/f 57,000 Dec 31 Net profit for the year 12,000 62,000

Closing the capital account Example 9: Assume that Flora Company had a net loss of $3,000 in 20X8 and the opening capital balance and the drawings for the year ended 31 December 20X8 were $50,000 and $5,000, respectively. The capital account would be closed as follows: Dec 31 Total for the year 5,000 20X8 $ Drawings Dec 31 Capital 5,000 Jan 1 Balance b/f 50,000 20X8 $ Capital Dec 31 Drawings 5,000 “ 31 Net loss for the year 3,000 “ 31 Balance c/f 42,000 50,000 Learning Objectives

Balance sheet A balance sheet is a statement showing the _______ ______ of a business at a ____________. After the ____________________________ is prepared, all the accounts should be closed except the _____, _______ and _____ accounts. These accounts are then listed on the ___________. financial position particular date trading and profit and loss account assets liabilities capital balance sheet Balance sheet is not part of the ________________; it is only a ___ of assets, liabilities and capital balances. These accounts are not closed at the year end, and the balances in these accounts are carried forward to the _________________. double entry system list next accounting year Balance sheet is a presentation of the _________ _______ in a statement form. accounting equation

Balance Sheet as at (date) Layout of a balance sheet: Balance Sheet as at (date) $ Fixed Assets Capital Details of fixed assets XXX Details of capital XXX Current Assets Long-term Liabilities Details of current assets XXX Details of long-term liabilities XXX Current Liabilities Details of current liabilities XXX XXX Assets Capital + Liabilities

Balance sheet Fixed assets are assets which have a long life and are to be used in the business. Examples are: Land and buildings Fixtures and fittings Machinery Motor vehicles

Balance sheet Current assets are assets that are likely to be converted into cash in the short term or are items with a short life. Examples are: Stock Debtors Bank Cash

Balance sheet Long-term liabilities are liabilities that do not have to be repaid in the near future. An example is a three-year loan from a bank. Current liabilities are liabilities that are to be repaid for in the near future. An example is creditors.

Balance sheet Steps for preparing a balance sheet: Example 10: Based on the information in Examples 7 and 8, and the following balances extracted on 31 December 20X8 (after the trading and profit and loss account was prepared and the capital account was closed), prepare a balance sheet for Flora Company as at 31 December 20X8. $ Furniture and fittings 30,000 Motor vehicles 20,000 Debtors 20,000 Bank 10,000 Cash 5,000 Long-term loan from Kowloon Bank 30,000 Creditors 8,000 Steps for preparing a balance sheet:

Balance sheet tep Classify the balances remaining in our books (after preparing the trading and profit and loss account) into fixed assets, current assets, capital, long-term liabilities and current liabilities. $ Furniture and fittings 30,000 Fixed asset Motor vehicles 20,000 Fixed asset Debtors 20,000 Current asset Bank 10,000 Current asset Cash 5,000 Current asset Long-term loan from Kowloon Bank 30,000 Long-term liability Creditors 8,000 Current liability

Balance Sheet as at 31 December 20X8 List the balances of fixed assets and current assets on the left-hand side of the balance sheet. Get their subtotals and add them up to arrive at total assets. tep Balance Sheet as at 31 December 20X8 Flora Company Fixed Assets $ $ Furniture and fittings 30,000 Motor vehicles 20,000 50,000 Current Assets Stock 10,000 Debtors 20,000 Bank 10,000 Cash 5,000 45,000 95,000

Balance Sheet as at 31 December 20X8 List the balances of capital, long-term liabilities and current liabilities on the right-hand side of the balance. Get their subtotals and add them up to arrive at the total of capital and liabilities. tep Current Assets 50,000 Furniture and fittings 30,000 Debtors 20,000 95,000 Balance Sheet as at 31 December 20X8 Fixed Assets $ Flora Company Motor vehicles 20,000 Stock 10,000 Bank 10,000 Cash 5,000 45,000 Capital $ Balance as at 1 Jan 20X8 50,000 Add Net profit for the year 12,000 62,000 Less Drawings 5,000 57,000 Long-term Liabilities Loan from Kowloon Bank 30,000 Current Liabilities Creditors 8,000 95,000

Balance Sheet as at 31 December 20X8 tep Enter the totals of the two sides that should be level with each other. 95,000 Furniture and fittings 30,000 Balance Sheet as at 31 December 20X8 Capital $ Fixed Assets $ Flora Company Motor vehicles 20,000 50,000 Current Assets Stock 10,000 Debtors 20,000 Bank 10,000 Cash 5,000 45,000 Balance as at 1 Jan 20X8 50,000 Add Net profit for the year 12,000 62,000 Less Drawings 5,000 57,000 Long-term Liabilities Loan from Kowloon Bank 30,000 Current Liabilities Creditors 8,000 Learning Objectives

Final accounts in vertical format Final accounts (trading and profit and loss accounts and balance sheets) are sometimes prepared in ____________ instead of horizontal format. The results are the ____ using either presentation method. vertical format same Example 7 is now shown in vertical format:

Final accounts in vertical format Flora Company Trading and Profit and Loss Account for the year ended 31 December 20X8 $ $ $ Sales 100,000 Less Returns inwards 3,000 97,000 Less Cost of goods sold: Opening stock 8,000 Add Purchases 60,000 Less Returns outwards 5,000 55,000 Add Carriage inwards 5,000 Goods packaging 4,000 72,000 Less Closing stock 10,000 62,000 Gross profit 35,000 Add Other revenues: Commission receivable 2,000 37,000 Less Expenses: Salaries 10,000 Electricity 5,000 Rent 10,000 25,000 Net profit 12,000

Final accounts in vertical format We have mentioned that the balance sheet is a presentation of the _______________ in statement form. In a vertical style balance sheet, it shows Fixed assets + Net current assets – Long-term liabilities = Capital. accounting equation Net current assets occur when current assets ______ current liabilities. When current liabilities exceed current assets, their difference is called _________________. exceed net current liabilities Example 10 is shown in vertical format:

Balance Sheet as at 31 December 20X8 Final accounts in vertical format Flora Company Balance Sheet as at 31 December 20X8 Fixed Assets $ $ Furniture and fittings 30,000 Motor vehicles 20,000 50,000 Current Assets Stock 10,000 Debtors 20,000 Bank 10,000 Cash 5,000 45,000 Less Current Liabilities Creditors 8,000 Net current assets 37,000 87,000 Less Long-term Liabilities Loan from Kowloon Bank 30,000 57,000 Financed by: Capital as at 1 January 20X8 50,000 Add Net profit for the year 12,000 62,000 Less Drawings 5,000 57,000

Balance Sheet as at 31 December 20X8 (extract) Final accounts in vertical format Sometimes, long-term liabilities are shown under capital in a vertical style balance sheet. Below is an example: 57,000 Capital $ Balance as at 1 January 20X8 50,000 Add Net profit for the year 12,000 62,000 Less Drawings 5,000 Balance Sheet as at 31 December 20X8 (extract) Flora Company Long-term Liabilities Loan from Kowloon Bank 30,000 87,000 Learning Objectives

hink Corner Sometimes, businesses may have several departments. Are the final accounts for these companies prepared in the same way as mentioned before? nswer No. There will be extra columns in the trading and profit and loss account for companies with several departments. Sales revenue and expenses are split among various departments and are recorded in these extra columns.

hink Corner Sometimes, businesses may have several departments. Are the final accounts for these companies prepared in the same way as mentioned before? nswer No. There will be extra columns in the trading and profit and loss account for companies with several departments. Sales revenue and expenses are split among various departments and are recorded in these extra columns.

Departmental accounts Example 11: The following balances were extracted from the books of Longway Company as at 31 March 20X7. $ Sales: Audio department 50,000 Digital camera department 70,000 Stock (1 Apr 20X6): Audio department 10,000 Digital camera department 20,000 Purchases: Audio department 20,000 Digital camera department 40,000 Stock (31 Mar 20X7): Audio department 15,000 Digital camera department 10,000

Trading Account for the year ended 31 March 20X7 Departmental accounts Longway Company Trading Account for the year ended 31 March 20X7 Audio Digital Camera $ $ $ $ Sales 50,000 70,000 Less Cost of goods sold: Opening stock 10,000 20,000 Purchases 20,000 40,000 30,000 60,000

Trading Account for the year ended 31 March 20X7 Departmental accounts Longway Company Trading Account for the year ended 31 March 20X7 Audio Digital Camera $ $ $ $ Sales 50,000 70,000 Less Cost of goods sold: Opening stock 10,000 20,000 Purchases 20,000 40,000 30,000 60,000 Less Closing stock 15,000 15,000 10,000 50,000 Gross profit 35,000 20,000 Learning Objectives

Final accounts for the service sector In a trading account, we calculate the gross profit by subtracting the costs of goods sold from the sales. What if a business does not trade in goods? For businesses not trading in goods, there is no need to prepare a trading account. A __________________ is enough. The final accounts for these businesses are a profit and loss account and a balance sheet. profit and loss account Examples of businesses not trading in goods are those in the ____________, such as dentists, accountants and lawyers. service sector Revenue earned by service providers is usually called fees earned, commission earned or services charged.