• No products in the cart.

FINANCIAL STATEMENTS

In the trading account, the cost of goods sold is subtracted from net sales for the period to calculate gross profit. ... Items included on the debit side are opening stock, purchases, and direct expenses and on the credit side are sales and closing stock. The resultant figure is either gross profit or gross loss.

Financial statements prepared from a trial balance

The trial balance records both revenue and capital items which both aid in preparation of the final accounts and the balance sheet. The financial statements prepared are those reporting income.

Final accounts / revenue accounts

The form of final accounts for an organization varies according to the nature of activities covered by the business. A trading firm prepares a trading and profit or loss account and balance sheet. A social club (not profit making) prepares an income and expenditure account plus also a balance sheet. While partnership in addition to a trading and profit or loss account it prepares and appropriate account.

final accounts of trading business.

Final accounts are prepared to determine the profits made by the business. This firm prepares a trading and profit or loss account plus balance sheet as the final account. The final accounts are divided into sections;

  • Trading account
  • Profit or loss account
  • Balance sheet ( though not an account)

Trading account

This is account usually prepared to ascertain the gross profit or gross loss. (this includes all expenses directly incurred in the trading process) at the end of a trading period.

Gross profit. Is the excess of sales over the cost of sales ( cost of goods sold)

Or

GROSS PROFIT.¬†It‚Äôs the excess of selling price over cost price or the excess of net sales/turn over, over cost of sales i.e Gross profit = sales / turn over ‚Äď Cost of Sales

Where cost of goods sold

Is derived by adding purchases to the opening stock minus closing or (cost of goods available for sale ‚Äď closing stock) ie ( opening stock + purchases ‚Äď closing stock)

Where goods available for sale

Is opening stock plus the total purchases for the period. (opening stock + purchases)

Note

Gross loss: if the cost of goods sold exceeds the sales, the difference will be a gross loss. The main items in the trading account are the sales, purchase, opening stock and closing stock. A trading account or any other accounts also has a heading which is stated in three forms.

Double entry in the trading account

The principle of double entry still applies to the items appearing in the trading account. The purchase and sales accounts are closed at the end of the period by transferring them to the trading account.

In this case.

Purchase

Dr. trading account

Cr. Purchases account

Sales

Dr. Sales account

Cr. Trading account

Further adjustments to the trading and profit account

Stock accounts

The goods purchased during a particular trading period may be partly unsold at the end of that period. These goods unsold are regarded as stock on hand or closing stock. This closing stock is valued at cost or net realizable value whichever is lower.

The stock valued at the end is not part of double entry up to the time of valuation. Thus closing stock is not shown into the trial balance. It is shown as additional information. Stock is treated as below.

Opening inventory

So far we have looked at a business in its first year of trading. Once a business trades for more than one accounting period of time then it will  be likely  we will  have inventory in hand at the start of the period  (opening inventory) as well  as inventory at the end of the period  (closing inventory).

Opening inventory is available for use and resale so it will be added into the cost of goods sold calculation. The opening inventory will be a debit entry in the trial balance (closing inventory will always be found in the additional information to the trial balance).

Opening stock

Dr. trading account

Cr. Stock account (to close stock account)

Closing stock.

Dr. balance sheet

Cr. Trading account

Carriage

Treatment of carriage
Type  of carriageDefinitionAppears as expense in
Carriage inwardsThe cost of transporting goods from suppliers  into  the  businessTrading  account
Carriage outwardsThe cost of transporting goods from the  business  to customersProfit and  loss account

Carriage is an expense relating to the transport of goods.  There are two types of carriage, and their treatment is as follows:

The reason  why  the two  types  of carriage expenses are treated in different  ways  is that carriage inwards is connected with  the  cost  of getting goods  ready  for sale  and therefore belongs  in the cost of goods sold calculation

 Returns

We have already dealt with the accounting entries for both returns inwards and returns outwards. However, we will also need to make adjustments in the trading account for the returns. These adjustments are as follow

Adjustments needed for returns

Returns inwards                    Deduct from sales

Returns outwards                 Deduct from purchases

This means that the full cost of goods sold calculation would appear as follows:

Adjustments needed for the cost of goods sold

Opening inventoryThe order  in which the cost of goods sold is adjusted
AddPurchasesFor returns outwards and carriage is not important.
AddCarriage  inwards
LessReturns  outwards
LessClosing  inventoryHowever,  it is good practice to show  your full
EqualsCost of goods sold Workings when the adjustments are made.

TRADING ACCOUNT in Accounts and Finance for Managers Tutorial 01 November 2020 - Learn TRADING ACCOUNT in Accounts and Finance for Managers Tutorial (9021) | Wisdom Jobs India

Example one

On 31st December 1995 Ouma’s accounts disclosed  the following information.

Purchases shs 20,000, sales shs 40,000; stock on 1st jan shs 8,000; stock at close shs 9,000. Show the trading account for the year and necessary closing entries.

Example 2;

From the details given below prepare Mugasha’s trading Account for the year ended 31/12/93.

Stock 1/1/93         4,800

Stock 31/12/93     6,600

Purchases             43,500

Sales                     60,000

Profit and loss account

This follows immediately after the trading account of which it is really a continuation. The profit or loss account is a financial statement prepared to show the net profit or net loss of the business at the end of the accounting period usually a year. This is after all expenses and gains have been put into account.

  • NET PROFIT.¬†This is the actual profits of a business after subtracting all expenses from the gross profits. i.e¬†¬†¬†¬†¬†¬†¬†¬†¬† Net profit = Gross profit ‚Äď Expenses

Note: net profit is added on to capital of the business in the balance sheet because it increases capital

  • NET LOSS. It‚Äôs where the business expenses exceed the gross profit. It‚Äôs subtracted from capital in the balance sheet. i.e¬†Capital ‚Äď Net Loss
  • Expenses. These are costs incurred to keep the business operating e.g Rent, Electricity bills, transport, salaries and wages, insurance premiums, advertising costs, postage and stationery, bad debts, depreciation of fixed assets, carriage on sales etc.

Gross profit

Dr. trading account

Cr. Profit or loss account

Expenses

          Dr. Profit or loss account

Cr. Respective expense account

BALANCE SHEET. It’s a financial statement prepared to show the financial position of a business at a given date/ period of time

          OR

It is a financial statement that shows the value of assets, liabilities and capital of a business as a particular date

  • It refers to a person or firm that owes the business money I.e a person or firm supposed to pay business money. e.g a person to whom the business has supplied goods on credit
  • Note: debtors are a current asset to the business
  • This is a person or firm to whom the business owes money. I.e a person or firm that is supposed to be paid by the business. E.g a supplier of goods to the business on credit
    • Note: creditors are a current liability to the business
  • It refers to money or goods taken from the business by the owner for personal or private use. Drawings are subtracted from capital because they reduce the capital of the business. i.e capital ‚Äď drawings
  • This is an economic state where the business has more assets than liabilities and therefore capable of paying its debts from its own sources.
  • This is an economic situation where the business has more liabilities than it assets and the business is unable to meet its debts from its own sources. This implies that the business cannot pay its debts even if it sells off its assets.
  • ¬†¬†insolvency is not same as bankruptcy. A business may be insolvent and may still continue trading and may even be able to wipe off the deficiency. But once it is declared bankrupt, it must cease functioning, sell off its assets and distribute the proceeds among creditors in ratio of their debts
  • This is an economic situation where the business has excessive liabilities or debts and it cannot even pay them.
  • This is the money or physical items such as machinery invested in the business with the aim of making profits
  • Working capital.¬†This is the amount of money needed for daily running of the business
  1. Is the excess of current assets over current liabilities of a business (Net Current Assets).It is given by

Working Capital = Current Assets ‚Äď Current Liabilities

Note: when the current liabilities exceed current assets, the business is said to be Deficient of working capital and this situation is called Deficiency

  • Liquid capital.¬†It refers to current assets that can easily convert and quickly be converted into cash. Ie Quick assets. They include cash at hand. Cash at bank and debtors

Note. Closing stock is excluded because it takes a little bit of time to be sold on credit first and later cash is collected after a given credit period

N.B. liquid funds means cash at hand and cash at bank only

  • Capital employed.¬†This refers to the total assets used in the business or summation of fixed assets and working capital.
  • Borrowed capital.¬†This is the amount of money borrowed by the business and it‚Äôs to be paid back after a long period e.g Bank loan , Debenture and Mortgage
  • Circulating capital.¬†These are total current assets whose value keeps on changing.
  • LIABILITIES. These are debts or financial obligations of a business to the outsider, ie debts that must be paid by the business to the owner or outsiders. Liabilities are of two categories
  • Long term liabilities. These are claims or debts of a business payable over a long period of time ie over one year. E.g loans , debentures, capital, creditors
  • Current / short term liabilities. These are debts of a business payable within a short period of time not exceeding one year. E.g creditors, bank overdraft, accrued, unpaid expanses, incomes received in advance , Expenses due, arrears
  • These are properties of value owned and used by a business to generate income. They are categorized into two i.e current and fixed assets
  • Fixed assets (Non-current assets). These are properties of value acquired by a business for use over a long period of time I.e more than one year and are not for resale e.g buildings, machinery, furniture, motor vehicle, fixtures and fittings, equipment‚Äôs, tools, textbooks, Good will etc
  • Current assets.¬†These are properties of value used by a business for a short period of time i.e not exceeding one year. E.g not exceeding one year. E.g closing stock, debtors, cash in hand, prepaid expenses, income earned but not yet received etc some of them are used in the day to day running of the business while others are for resale like stock
  • UNDERTAKING. It is where a firm has less stock compared to other current assets
  • refers to how the business has financed its assets ie (private finance or borrowed finance)
  • OVER¬†¬†This is where a business invests most of its capital or money in fixed assets than current assets hence making it less profitable.

Note. This means that the business will constantly borrow from outside to get working capital.

  • UNDER CAPITALIZATION. this is where the firm‚Äôs current assets are most than its fixed assets

 Adjustments to financial statements

Accruals and prepayments

Learning objectives

By the end of this chapter, you should be able to

  • Define accruals and prepayments of income and expenses and explain the need for their adjustments
  • Account for accruals and prepayments in financial statements

 Introduction

IAS 1; presentation of financial statements requires that an entity prepares its financial statements using accrual basis of accounting. An entity records incomes as they are earned and expenses as they are incurred, not necessarily when cash changes hands.

Accrued expenses

This is an expense, which has been incurred but not yet paid. They can also be called expenses payable/ outstanding expenses/ expenses due to be paid / expenses not paid/ expenses owing. Accrued expenses must be expensed in the year they occur (are incurred) and treated as current liabilities in the statement of financial position or balance sheet.

The journal entries to record accruals are as follows

Dr. Income statement or respective expense account

Cr. Accrued / expenses payable / outstanding account

Example the trial balance figure for salaries for the financial year ended 31/12/2000 amounted to shs 6,200,000. By 31/12/2000 accrued salaries amounted to shs 250,000

Show the journal entries to account for accrued salaries

Profit or loss account extract to record the salaries expense for the year

The balance sheet to record what is carried forward

Prepaid expenses. Expenses which have already been paid but relate to the following accounting period. These should not be among the expenses for the current period and therefore should not appear in the income statement of the current year. However, prepaid expenses are current assets to be exhausted in the next 12 months.

Journal entries

Dr. prepaid expenses account (current assets)

Cr. Income statement or respective expenses account (to reduce the overstated expenses)

E.g the total trial balance figure for insurance expense as at 31/12/2003 was shs 380,000 out of which shs 120,000 was prepaid

required

  • Show the journal entries to account for prepaid insurance.
  • Profit or loss account to record the insurance expense for the year
  • Balance sheet to record what is carried forward.

Note. When an expense is prepaid, it is subtracted from what was paid to obtain the exact amount/ figure that relates to the current accounting period. Prepaid expenses are shown as current assets in the balance sheet.

Accrued incomes/ incomes receivable / outstanding incomes.

This is income relating to the current accounting period but has not yet been received. In this case, the organization has already invoiced its clients for the services offered but payments are not yet made. Accrued incomes are current assets to be received and used in the next 12 months.

Journal entries to record accrued incomes.

Dr. accrued income account (current asset)

Cr. Income statement or respective income / gain account (to record incomes earned)

E.g rent received during the year amounted to shs 650,000. Accrued or owed rent as at 31/12/12 amounted to shs 70,000

Required

  • Show journal entries to bring accrued rent income into account.
  • Profit or loss account extract to record accrued rent as income for the year.
  • Balance sheet extract to record what is carried forward.

Note. When incomes accrue, they must be recorded in the income statement as incomes for the period though not yet received. These incomes should be recorded in the balance sheet as current asset.

Example

On 1st October 2015, Okot entered into a contract to provide cleaning services to an office. He was paid shs 6,000,000 by cheque for a period of six months to 31st march 2016.

Prepare ledger accounts in the books of okot to record the above transactions for the year ending 31.dec.2015

Note: the financial year ended on 31 December 2015 and yet the income received was for six months ending 31. March 2016. This implies that income for 3 months (January to march 2016) shs 3,000,000 had been received in advance, since it relates to the subsequent financial year. The transactions will be recorded in the books as follows:

Prepaid income / income received in advance / unearned income / deferred income.

This is income which has already been received but relates to the following account period. This is a current liability on the side of the entity offering a service and therefore not been taken as being realized for the current accounting period. This income should be excluded from the incomes of the current period.

The journal entries to record incomes received in advance are as follows.

When income is received

Dr. Cash / bank account (cash received)

Cr. Respective income account

When eliminating the portion received in advance

Dr. Income statement / respective income account

Cr. Income in advance / unearned income / prepaid income account

e.g rent income received during the year ended 31/12/2002, amounted to shs 800,000  of which shs 80,000 was received in advance as at 31/12/2002

Required

  • show the journal entries to account for incomes in advance
  • profit or loss extract to record the exact rent income received for the year ended 31/12/2002
  • Balance sheet extract to record what is carried forward.

Note. When income is received in advance, it is subtracted from incomes received to obtain the exact income earned for the year. Income in advance / unearned income is shown as a current liability in the balance sheet.

Type  of balance:Balance on  account:Appears on  statement of financial position as:
AccrualCreditCurrent liability
PrepaymentDebitCurrent asset
Accrued  revenueDebitCurrent asset
Prepaid  revenueCreditCurrent liability

Bad debts, discounts and provisions

Business entities normally sell goods and render services on credit terms. This creates trade receivables or debtors. When goods are sold or services are rendered on credit, the individual customers’ accounts in the subsidiary ledger are debited and the periodic totals are debited to the total debtors control account.

However, some of these debtors may not be realized, hence the need to provide an allowance for doubtful debts or write off some debts that cannot be recovered. In addition, the entity might give discounts for prompt payment by its customers. This necessitates making a provision for discount allowed. The debtors are assets to an entity and they appear as current assets in the statement of financial position.

Business entities also buy or purchase goods on credit. This creates trade payables. When goods are bought on credit, the individual suppliers’ accounts in the subsidiary ledger are credited and the periodic totals are credited to the total payables control account.

An entity may receive discounts for prompt payment to its creditors. This necessitates making a provision for discount received. Trade payables are liabilities and they appear under current liabilities in the statement of financial position.

Provisions are amounts set aside out of profits for specific purposes. Examples include provision for bad debts or doubtful debts, provision for discount allowed or received, and provision for depreciation, provision for depreciation. Provisions are made to cater for anticipated future losses.

 Bad debts

Bad debts or irrecoverable debts arise when a customer fails to pay a debt either in full or partially. This implies that the debts cannot be realized and hence should be written off, thereby, creating an expense to the entity.

Bad debts may arise due to:

  • Bankruptcy of a credit customer and nothing can be received from the customer
  • Failure of a customer‚Äôs business and only a portion of the debt can be recovered
  • Refusal by a customer to settle an amount or part of the amount due to or death of a customer and the debt cannot be recovered.

When an entity realizes that a debt is unlikely to be received / recovered, it must be written off. This ensures that the entity’s receivables (an asset) are not overstated in line with the prudence concept. In this instance, an expense called bad debts or irrecoverable debts will be created, hence increasing the entity’s operational costs and reducing the debtors in the statement of financial position. The following entries will be passed to record bad debts written off.

Dr. Bad debts (irrecoverable debts) accounts

Cr. Receivable / debtors’ or customers account.

Example one

Abim ltd had two debtors, ABC ltd owing shs 5,500,000 and Napak enterprises shs 3,800,000 at 31st dec 2017.  ABC ltd had been declared bankrupt on 24 December 2016. Napak enterprise closed its business on 30 November 2017 and could not pay its debts. The proprietor of Napak left the country.

On 31st December 2016, Abim ltd decided to write off the above debts since they were irrecoverable.

Required

Prepare the ledgers to write the above debts and transfer them to the statement of profit or loss and other compressive income.

Bad debts recovered

There are instances when bad debts written off are subsequently recovered. The debts may either be settled in full or partially. It is therefore necessary to cancel the effect of the debt which had been written off.

In other-wards, when bad debts written off are recovered, the entry for the amount written off should be reversed and customer account is re-instated, as follows:

  • Debtors‚Äô or customers‚Äô account ( with the amount of bad debt earlier written off)
  • Bad debts recovered account (with the amount of the bad debt earlier written off)

Note.

It is important to first re-instate the debt on a customer’s account because it facilitates tracking the credit history of the customer. It also helps to determine whether to give credit to the customer in future.

When the payment is received, either full or partially:

  • Bank or cash account
  • Debtors or customer‚Äôs account, with the amount received.

The balance in the bad debt recovered account will be shown as an income in the statement of profit or loss account and other comprehensive income.

Example

Mugerwa whose account for shs 2,000,000 had been written off in March 2009, cleared the amount in April 2018 by cheque

Required

Show the necessary ledger accounts to affect the above transactions in 2018.

Solution

Example

On 10th Feb 2005 a cheque for shs 75,000,000 was received from John. This amount had been previously written off as a bad debt.

Provision or allowance for doubtful debts

These are amounts that are set aside to cater for an estimate amount of bad debts. Once some debtors default their debts, funds are extracted from this fund to patch up the deficiency, otherwise the business would lack its working capital.

It is therefore prudent to create a provision or allowance to recognize the potential loss arising from the possibility of incurring a bad debt.

The allowance for doubtful debts is created passing the following entries

  • Bad debts or irrecoverable debts account
  • Provision or allowance for doubtful debts account.

The doubtful debt created above is an expense to the entity and it is deductible from gross profit in statement of profit or loss. The credit balance in provision or allowance for doubtful debts account will be deducted from the total debtors balance in the statement of financial position at the end of the financial year. It should be noted that the allowance for doubtful debts reduces the debtors balance to the amount that the entity prudently estimates to recover in the future.

Types of allowance for doubtful debts

  • Specific allowance
  • General allowance

Specific allowance

Is created in respect of specific debtors who are known to be facing financial problems or have a trade dispute with the entity. A specific allowance may not be created for the entire amount of the doubtful debtors but only a portion of it. For example, if there is a 75% chance of recovering a doubtful debt in respect of a certain receivable, a specific allowance of only 25% may be created.

General allowance

Is created based on the past history. Due to past history, an entity might be in position to estimate a portion of receivable balances which may not be recovered. Entities therefore, prudently create a general allowance for doubtful dents in addition to the specific allowance.

Accounting for allowance for doubtful debts

On creation of an allowance for doubtful debts

In the year in which the allowance is made:

  • Bad debts account or statement of profit or loss account
  • Provision or allowance for doubtful debts

In subsequent years, the allowance may either increase or decrease:

In case of an increase in the allowance:

  • Bad debts account or statement of profit or loss account
  • Provision or allowance for doubtful debts account

In case of a decrease in the allowance

  • Provision or allowance for doubtful debts account
  • Bad debts or statement of profit or loss account

Example

Obote ltd provided the following in relation to the trade receivable

DateTrade DebtorsBad debt w/oDoubtful debts allowance
31.dec.18250,000010,750
31.dec.19370,0009,00016,400
31.dec.20225,00015,00014,350

Required

Prepare the following for the years ended 31.dec. 2018, 2019, and 2020

  • Bad debts account
  • Allowance for doubtful debts account
  • Statement of financial position extract

Note. Being an expense account, the bad debts account is closed by transferring the balance to the statement of profit or loss account

Note.

In 2018, the first year of provision the whole allowance is expensed, in the subsequent years, it is only the increase or decrease that is expensed or taken as income. In 2019, the allowance increased by shs 5,650 (16,400 ‚Äď 10,750), therefore, it is expensed. In 2020, the allowance decreased by shs 2,050 (16,400 ‚Äď 14,350), therefore it is again to the entity and is taken as income of profit or loss.

Statement of financial position (extract)

Current assets

2018

Debtors                                                   250,000

Less provision for doubtful debt           10,750                           239,250

2019

Debtors                                                     370,000

Less provision for doubtful debts         16,400                           353,600

2020

Debtor                                                    225,000

Less provision for doubtful debts         14,350                           210,650

Example

On 1st July, the provision for doubtful debts of ABC ltd had a credit balance of shs 62,000. On 30 June 2015, debts amounting to shs 58,000 were written off as bad. The balance on the trade debtor’s account before deducting the bad debts was shs 2,100,000.

On 30 June 2016, the trade debtors amounted to shs 1,800,000. It was decided to write off bad debts amounting shs 55,200 of that date.

The provision for doubtful debts is at 5% of trade debtors.

Required

Prepare the following in the books of ABC ltd, for the years ended 30 June 2015 and 2016

  • Bad debts account
  • Provision for doubtful debts accounts
  • Statement of financial position extract.

Statement of financial position (extracts)

Current assets

June 2015

Trade debtors ¬†¬†¬†¬†¬†¬† (2,100,000 ‚Äď 58,000)¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 2,042,000

Less allowance for doubtful debts                              102,100        1,939,900

June 2016

Trade debtors ¬†¬†¬†¬†¬†¬† (1,800,000 ‚Äď 55,200)¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 1,744,800

Less allowance for doubtful debts                              87,240        1,657,560

 Provision for discount allowed

Businesses normally give discounts to enable debtors settle their accounts promptly. The discount is a necessary cost to the business since the business is interested in receiving cash in the shortest possible time. Some businesses make a provision for discount allowed to their credit customers, since the money will not be received when the discounts are given. This helps not to overstate profits.

Provision or allowance for discounts allowed is calculated on the basis of debts which are likely to be raised (good debt). Therefore, it is calculated on the figure of net trade debtors (ie after deducting bad debts written off and allowance for doubtful debts)

The treatment of provision for discount allowed is similar to that of allowed is similar to that of allowance for doubtful debts. On creation, it is treated as follows

  • Discount allowed account or statement of profit or loss account
  • Provision or allowance for discount allowed

At the end of the year, the balance in the provision for discount allowed (either an increase or a decrease) which is taken to the statement of profit or loss. In case of an increase in provision for discount allowed. Then:

  • Discount allowed account or statement of profit or loss account
  • Provision or allowance for discount allowed (with increment).

In case of a decrease in the discount allowed. Then

  • Provision or allowance for discount allowed
  • Discount allowed account or statement of profit or loss account

An increase in provision for discount allowed is an expense while a decrease is an income to the entity.

Example one

The following information is extracted from the books of muhasha ltd as at 30 September 2017

DetailsShs
Trade debtors / receivables280,000
Discount allowed7,000
Bad debts written off5,800
Provision for doubtful debts 1.10.169,500
Provision for discount allowed 1.10.163,350

 

Additional information

  • Allowance for doubtful debts is at 5% of trade receivables
  • Provision on discount allowed is at 2% of trade receivables

Required

Prepare the following in the books of Muhasha ltd

  1. Trade receivable account
  2. Discount allowed account
  3. Provision for doubtful debts account
  4. Provision for discount allowed account
  5. An extract of the statement of financial position as at 30 September 2017

Provision for discount received

When a business pays for its debts promptly it is likely to receive discounts. The discount is an income to the business. The discount received is an income for the year in which debt is incurred, although it might be incurred in the following year.

Provision for discount received is calculated on trade payables (creditors)

On creation, it is treated as follows

  • Provision or allowance for discount allowed
  • Discount received account or statement of profit or loss account

At the end of year, the balance in the provision for discounts received account is deducted from the trade payables in the statement of financial position and carried forward to the next financial year.

In the subsequent years, it is the change in provision for discount received (either an increase or a decrease) which is taken to the statement of profit or loss. In case of an increase in provision for discounts received then;

  • Provision for discount received account
  • Discount received account or statement of profit or loss

In case of a decrease in the discount received then;

  • Discount received account or statement of profit or loss account
  • Provision for discount received account.

An increase in provision for discount received is an income while a decrease is an expense to the entity

Example one

On 1st January 2-15, the provision for discount received account of XYZ ltd was shs 6,200,000. On 31st December 2016, the balance on the trade payables account was shs 210,000,000.

On 31st December 2016, balance on payables account was shs 180,000,000.

The provision for discount received is at 5% of trade payables

Required

Prepare the following in the books of XYZ ltd, for the years ended 31st December 2015 and 2016.

  • Provision for discounts received account
  • Statement of financial position (extract)

The balance   sheet

This is the second part of final accounts; it is prepared after extracting   income statement.

It is the financial statement  that  shows  the  financial  position  of the  business  at a  given    date. It consists of Assets, Liabilities   and capital of the business at a particular period of           time.

  • Assets: These¬† are¬† valuable¬† items¬† or¬† things¬† which¬† a business¬† ¬† They can be classified¬†¬† into two; i.e fixed assets and current assets.
  • Fixed assets:¬† These¬† are assets¬† which¬† are¬† kept¬† by a business¬† for¬† its use for a long¬† period E.G¬† Plant¬† and¬† machinery , motor¬† Vehicles,¬† furniture , buildings, land
  • Current assets: these¬† are¬† assets¬† which¬† are¬† in¬† form¬† of cash¬† or¬† can¬† be¬† easily¬† hanged¬† into¬† cash in¬† the¬† shortest¬† time¬† e.g cash¬† in the¬† hand, cash¬† at bank, stock , debtors, prepaid¬† expenses¬† etc.
  • Liabilities: These are¬† financial¬† obligations¬† or¬† commitments, they can be¬† classified¬† into¬† two¬† e¬† long¬† term an¬† short¬† term¬† liabilities.
  • Long term liabilities: These¬† are¬†¬†¬† financial¬† obligations¬†¬† of a¬† business¬† which¬† are payable¬† at¬† a¬† date¬† which¬† is more than¬† one¬† year, i.e¬† from the¬† balance once¬† it has¬† been¬† invested¬† in a¬† business¬† by the¬† owner , it is¬†¬† supposed¬† to remain¬† in the business for¬† as long a s¬† the¬† business
  • Current¬† liabilities¬† or¬† short¬† term liabilities: These are¬† liabilities¬† which¬† are accrued¬† or outstanding¬†¬† one year¬† e from¬† the¬† balance¬† sheet¬† date. E.g creditors, tax payable, accrued or outstanding expenses etc.
  • Capital: This is money invested in the business to either start or sustain it. It can be used to buy fixed assets or current assets.

Types of capital

  • Equity capital: This¬† is¬† capital¬† invested¬† by¬† the¬† owner¬† of a¬† business¬† and¬† any¬† profit¬† made¬† ¬†¬†¬†¬†¬†¬†¬†¬† by¬† the
  • Loan capital:¬† This¬† is¬† the amount¬†¬† borrowed¬† by¬† the¬† business,¬† and¬† has to¬†¬† be¬† repaid¬†¬† at a¬† ¬† later
  • Working capital: This is the excess of current assets over current liabilities. It involves cash resources available to meet its daily or immediate obligations.
  • Capital employed: This¬† is¬† a¬† combination¬† of¬† total¬† fixed¬† assets¬† and¬† working¬† capital¬† of a
  • Net worth¬† of¬† a¬† business: This¬† is¬† the¬† owner ‚Äės¬† claim¬† on¬† the¬† It¬† is¬† obtained¬†¬† when¬† all¬† assets¬† of the¬† business¬† have been¬† sold¬† and¬† finance¬† have been¬† cleared. It is also known as owner‚Äôs equity.

Format of drawing up a balance sheet

It¬† can also¬† be¬† drawn¬† in¬† two¬† ways ¬†i.e¬† the ‚Äú T‚Ä̬† format¬† and¬† the¬† vertical¬† format¬† as¬† shown¬† ¬†below.

VERTICAL FORMAT OF BALANCE SHEET

DetailsAmountAmount
Fixed  assets
Motor vanXXX
FurnitureXXX
LandXXX
BuildingsXXX 
Good  willXXX
Total  fixed  assetsXXXXX
Current  assets
DebtorsXXX
Cash  at  bankXXX 
Closing  stockXXX 
Total  current  assetsXXXX 
Current  liabilities  
CreditorsXXX 
OverdraftsXXX 
Short  term  loanXXX 
Total  current  liabilities XXXX
Working  capital XXXXX
Capital  employed XXXXX
Financed  by  
CapitalXXXX 
Add  net  profitXXX 
Less  drawings(XXX) 
Add  long term  liabilities  
5 year  loanXXX 
Net worth capital XXXXX

 N.B

To  prove  the  mathematical  and  arithmetical  accuracy,  the  capital  employed  section    should be  equal  to  the  finance  by  section

Final Accounts | Financial Statements | Accountancy Knowledge

In case of a net loss, it is deducted from capital instead. This is because   a loss reduces some one’s   capital instead.

However, a student  should  not  worry  too  much  in  case  they fail  to  agree,  what matters  is the  entries,  so long  as  the  entries  are  well  posted  in their respective  positions.  Therefore   a  student  should  try  to  understand  but  not  cram  the  order  of the  income  statement  and  the  balance  sheet.

Try to use Viviane’s trail balance to draw up a balance sheet.

Given below is Kato’s trial balance as at 31st December 1992

Details                                               Dr                                  Cr

(000) shs               (000) shs

Debtors/creditors                               2,000                    2,000

Land and building (1st /1/1992)          5,000

Plant and machinery (1st /4/1992)     4,000

Fixtures and fittings                           3,000

Equipment                                            2,000

Motor vehicle (1st /7/1992)                 1,500

Purchases                                             2,500

Returns                                                500                         600

Discounts                                          1,000                      2,000

Stock                                                 1,500

Cash at hand                                         600

Cash at bank                                      3,400

Rent income                                                                         400

Sales                                                                                    7,000

General expenses                               1,000

Capital                                                                                16,000

Total                                                 28,000                    28,000

 Adjustments

(i) Unsold stock is shs 3,000,000

(ii) Depreciation each of the following items by 10% p.a.

Land and buildings, plant and machinery and motor vehicle

(iii) Shs 200,000 was received in advance for rent income

Prepare

a) Trading and profit and loss account and the balance sheet for the period ended 31st December 1992

KATO’S

                             TRADING PROFIT AND LOSS ACCOUNT

                             FOR THE PERIOD ENDED 31ST. DEC. 1992

 

          DETAILS                     SHS                     SHS                     SHS

          Sales                                                               7,000

Less sales returns                                                    500

Net sales                                                                                    6,500

LESS COST OF SALE

Opening stock                                                      1,500

Add purchase                              2,500

Less purchases returns                600

Net purchases                                                    1,900

Goods available for sale                                        3,400

Less closing stock                                                 3,000

Cost of sales                                                                                         400

Gross profits                                                                                      6,100

Add miscellaneous incomes

Discount received                                                                              2,000

Rent received                                                                                        400

Less rent income advanced                                                                   200

Adjusted gross profits                                                                        8,300

Less operating expenses

General expenses                                                  1,000

Discount allowed                                                  1,000

Depreciation of fixed assets

Land and building                                                    500

Plant and machinery                                                300

Motor vehicle                                                            75

Total expenses                                                                                   2,875

Net profits                                                                                         5,425

b)

                                      KATO’S

                             BALANCE SHEET

                   AS AT 31ST. DECEMBER. 1992

         

          DETAILS            COST                  ACCU DEP                     N.B.V

                                      Shs                          shs                                   shs

FIXED ASSETS

Land and building           5,000                       500                              4,500

Plant and machinery       4,000                       300                              3,700

Furniture and fitting¬†¬†¬†¬†¬†¬†¬† 3,000¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† ¬†¬†¬†¬† ‚Äst¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† 3,000

Motor vehicle                   1,500                         75                               1,425

Fixed capital                                                                                    14,625

CURRENT ASSETS

Debtors                                                       2,000

Stock                                                          3,000

Cash at hand                                                  600

Cash at bank                                               3,400

Liquid capital                                       9,000

 CURRENT LIABILITIES

Creditors                        2,000

Rent income                      200

Total current liabilities                                 2,200

Working capital                                                                                 6,800

Capital employed                                                                              21,425

 

FINANCED BY:

Capital                                                        16,000

Add net profits                                              5,425

Capital owned                                                                                   21,425

Example

The  following  information  was  extracted  from  Shambombo’s  trail  balance  as  at  31-12-2007. Use it to prepare an Income statement and a balance sheet as at that date.

DETAILSDR (SHS)CR (SHS)
Stock  (1.1.07)130,000
Purchases2,000,000
Carriage on  purchases5,000
Sales2,850,000
Sales  returns50,000
Purchases  returns55,000
Salaries  and wages420,000
Transport164,000
Electricity5,500
Insurance16,000
Office  repairs3,500
Rates  and  rent14,700
Discounts8,00012,100
Rent  received65,000
Carriage  on sales2,000
General  expenses5,300
Entertainment2,900
Motor vehicle250,000
Fittings105,000
Debtors450,000
Cash at bank650,000
Cash  at hand50,000
Capital600,000
Creditors367,200
Loan (5 yrs)340,000
bank over draft42,600
Total4,331,9004,331,900

Additional  information

  • Stock at close was valued at shs. 240,000
  • Electricity paid in advance was shs. 500
  • Insurance expenses¬† accrued¬† were at¬† as 1900
  • depreciation motor¬† vehicle¬† and fittings by¬† 24%
  • Rent and rated prepaid were worth shs. 700

SOLUTION

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† SHAMBOMBO ‚ÄėS INCOME STATEMENT FOR THE YEAR ENDED 31 12- 2007

DetailsAmountAmountAmount
Sales2,850,000
Less  returns50,000
Net  sales2,800,000
Less  cost  of sales
Opening  stock2,000,000
Add purchases5,000
Add  carriage  inwards2,005,000
Less  returns  outwards55,000
Net  purchases1,950,000
Goods  available  for  sale2,080,000
Less closing  stock240,000
Cost  of  sales1,850,000
Gross  profit  960,000
Add  discount  Received12,100
Add  rent  received65,000
Gross  income  1,037,100
Less  operating  expenses
Salaries  and  wages420,000
Transport164,000
Electricity5,500
Less  prepaid  electricity5005,000
Insurance16,000
Add  accrued  insurance1,90017,900
Office  repairs3,500
Rent  and  rates14,700
Less  prepaid rates70014,000
Entertainment2,900
Discount   allowed8,000
Carriage   on  sales2,000
General   expenses5,300
Depreciation ‚Äď Motor¬† vehicle60,000
Depreciation¬† ‚Äst fittings25,200
Total   operating  expenses 727,800
Net  profit309,300

SHAMBOMBO’S BALANCE SHEET AS AT 31-12-2007

DetailsAmountAmount
Fixed  assets
Motor  vehicle250,000 
Less  depreciation60,000 
Net  book  value190,000
Fixtures  and  fittings105,000 
Less  depreciation25,200 
Net  book  value79,800
Current assets
Stock240,000
Debtors450,000 
Bank650,000 
Cash50,000 
Prepaid  electricity500 
Prepaid  rent  and  rates700 
Total current  assets1,391,200 
Current   liabilities 
Creditors367,200 
Overdraft42,600 
Accrued  Insurance1,900 
Total  current  liabilities411,700 
Working¬† capital (current¬† assets ‚Äď current¬† liabilities979,500
Capital   employed  (working  capital  + Fixed  assets)1,249,300
Financed  by
Capital600,000 
Add  net profit309,300 
909,300 
Less drawings‚Äst
Add  long  term  liability  -loan340,000 
Net worth capital1,249,300