INTRODUCTION TO FINAL ACCOUNTS

The transition from the Trial Balance to the financial statements

Purpose of Preparing Financial Statements

Financial statements are prepared primarily for the business owner; but may be used by any interested third party with the owners consent.
Owner needs to know what returns were gained on his investment. Buyers need to know if the business is a profitable going concern. Investors/Partners need to know if it is worth the opportunity costs. Banks/Lenders need to know if the business is able to repay the debt/interest. Creditors need to know if they can recover their money if the business liquidates. Taxes have to be calculated and paid into the government treasury.

 Financial statements are sometimes refer to as Final Accounts

Financial Statements constitute

Trading Account Profit & Loss account Balance Sheet

The Trial Balance

Is a list of all the balances in the ledgers at the end of the period in review. It uses two monetary columns [debit, credit] The debit column displays the assets and paid up expenses [A + E ] as at the date of review; The credit column displays the liabilities and income gained [L + C] as at the date of review Trial Balance formula.. A + E = L + C

Trial Balance
Account name debit credit

Accounts on the Assets books with Expenses (paid up) balances

Liabilities Revenues

TB

A + E

L + R

Trial Balance as on
DR
Debtors Sales 1900 1900

CR

1900

1900

The Bal c/d on the account should be posted to the opposing column on the Trial Balance [eg if the Cash bal c/d fell on the credit side then it should be recorded in the debit column of the Trial Balance]
Assets, Expenses Liabilities, Income

Creditors figure (the summary total of the amounts owing to the suppliers recorded in this ledger) Debtors figure (the summary total of the amounts owed by the customers recorded in this ledger) Posting transfer data from the journals [Day Books] to the ledgers Balance off the act of finding the figure that makes both side equal Debit the act of recording data on the left hand side of the account Credit the act of recording data on the right hand side of the account

The Trading Account

This account is used to calculate the gross profits Gross profits = net sales less cost of sales
Net Sales = total sales less sales returns (returns inward) Cost of Sales = cost of goods available less closing stock Cost of Goods available = opening stock plus net purchases Net Purchases = total purchases plus carriage in less purchases returns (returns outward)

The Trading Account

Trading a/c for the period ending [date] $ Sales
less

$ x x A

Returns In
net sales

Stock [opening]
add

x x x v

Purchases add Carriage in

less Returns Out

net purchases

x x B x C D

Goods avaiable for sale

less less

Stock [closing] Cost of Sales Gross Profits

The Profit & Loss Account

This account is used to calculate the net profits Net profits = Total profits less Total Expenses Total Profits = gross profits plus other revenue/income
Other Income = any non-trading revenues received Total Expenses = any costs incurred in order to make a profit

The Profit & Loss Account

Profit & Loss a/c for the period ended [date] Gross Profits
add

D x x x E

discount received *other income received reduction in doubtful debts#

total income

less

EXPENSES: generic expenses

[add accruals deduct prepayments]
working working working

x x x x F G

provision for doubtful debts# providion for depreciation

total expenses

NET PROFITS

The Balance Sheet

This shows the financial status of the business at a given date. It reveals the value of the assets, liabilities, and capital... such that -: Net Capital = Net Assets less long term liabilities [C = A L] Net Assets = Fixed Assets plus Working Capital Working Capital = Current Assets less Current Liabilities Long term Liabilities = debts which become due after 1 year

OR
Net Capital = opening capital plus net profits less drawings

Balance Sheet as at [date]

add

FIXED ASSETS:
fixed asset A [less depreciation] CURRENT ASSETS: c <d> J

less add

CURRENT LIABILITIES:
Working capital

<k> L

m
less Long term liabilities [if any]
total net assets

<x>

FINANCED BY: Capital [opening balance] add Net profits

x x

n
less Drawings total capial

<x>