CHAPTER TWO
FINAL ACCOUNTS (FINANCIAL STATEMENTS) FOR
DIFFERENT SECTORS
Table of Contents
INTRODUCTION ...... 2
Financial Accounting: ...... 2
Managerial Accounting:...... 2
ELEMENT OF FINANCIAL STATEMENTS ...... 2
THE BUSINESS HAS THREE TYPES OF ACTIVITIES AND THEIR ACCONTS 4
1. Trading Sector has three types of final accounts...... 4
a) Trading Account...... 4
b) Profit & Loss Account...... 4
c) Balance Sheet...... 4
2. Servicing Sector has two types of final accounts...... 4
a) Profit and Loss Account...... 4
b) Balance Sheet...... 4
3. Manufacturing Sector has four types of final accounts...... 4
a) Manufacturing Account...... 4
b) Trading Account...... 4
c) Profit & Loss Account...... 4
d) Balance Sheet...... 4
EXAMPLES ...... 5
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INTRODUCTION
The essential characteristics of accounting are the identification, measurement, and communication of the financial information about economic to interested parties.
Financial Accounting:
. Financial accounting is a systematic way of recording the financial transactions of business. Its purpose is the preparation of Income Statement, Statement of Changes in
Equity (statement of Capital), Balance sheet, & Statement of Cash Flows.
Managerial Accounting:
Is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, control and evaluate a company's operation.
ELEMENT OF FINANCIAL STATEMENTS
Assets: Probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events.
Liabilities: Probable future sacrifices of economic benefits arising from present obligations of a particulate entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Equity: Residual interest in the assets of an entity that remains after deducting its liabilities.
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Investments by Owners: Increases in net assets of a particular enterprise resulting from transfers to it from other entities of something of value to obtain or increase ownership interest (or equity) in it. Assets are most commonly received as investments by owners.
Comprehensive Income: Change in equity (Net assets) of an entity during a period from transaction and other circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investment by owners and distributions to owners.
Revenue: Inflows or other enhancements of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services or activities that constitute the entity's ongoing major or central operations.
Expenses: Outflows or other using up assets, or incurrence of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services or carrying out other activities that constitute the entity's ongoing major or central operations.
Gains: Increase in entity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events, and circumstances, affecting the entity during a period, except those from revenues or investments by owners.
Losses: Decrease in entity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting a period except those that from expenses or distributions to owners.
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THE BUSINESS HAS THREE TYPES OF ACTIVITIES AND THEIR ACCONTS
1. Trading Sector has three types of final accounts. a) Trading Account. b) Profit & Loss Account. c) Balance Sheet.
2. Servicing Sector has two types of final accounts. a) Profit and Loss Account. b) Balance Sheet.
3. Manufacturing Sector has four types of final accounts. a) Manufacturing Account. b) Trading Account. c) Profit & Loss Account. d) Balance Sheet.
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EXAMPLES
Final Accounts for Trading Companies:
Trading A/C
Opening Inventory (opening Stocks) xxx Sales (Sales Revenue) xxx
Purchases xxx Purchases Returns xxx
Sales Returns xxx Purchases Allowances xxx
Sales Allowances xxx Purchases Discount xxx
Sales Discount xxx Ending Inventory (closing Stocks) xxx
Purchases Expenses:
Freight Inward (Transfort in) xxx
Insurance on Purchases xxx
Purchases commission xxx
Import duties xxx
Profit and Loss a/c (Gross Profit) xxx Profit and Loss a/c (Gross Loss) xxx
XXX XXX
Note 1: - the difference between the two sides of the Trading Account represents gross profit or gross Loss. If the credit side is more than the debit side the result is gross profit. The Entry is as follows:
From: Trading a/c xxx
To: Profit & Loss a/c xxx
Note 2: - If the Debit side is more than the credit side the result is gross loss. The
Entry is as follows:
From: Profit & Loss a/c xxx
To: Trading a/c xxx
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Trading Statement
Sales Revenue xxx
Deducts:
Sales Returns xxx
Sales Allowances xxx
Sales Discount xxx (xxx)
Net Sales xxxx
Cost of Goods Sold:
Beginning Inventory (beginning Stocks) xxx
Purchases xxx
- Purchases Returns (xxx)
- Purchases Allowances (xxx)
- Purchases Discount (xxx)
Net Purchases xxx
Add: Purchases Expenses xxx
Cost of Purchases xxx
Cost of Goods Available for Sale xxx
- Ending Inventory (Ending Stocks) (xxx)
Cost of Goods Sold (xxx)
Gross Profit or (Gross Loss) xx (xx)
………………………………………………………………………………………….
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EXAMPLE: - The following are balances extracted from the ledger of the Hemn Company at the end of the month ended September 30, 2020.
Opening Inventory $ 18,000, Purchases Discount $ 3,000, Sales $ 250,000, Purchase Returns $ 6,000, Sale Returns $ 10,000, Purchases Allowance $ 2,000, Insurance on Purchases $ 8,000, Freight Inward $ 14,000, Sales Allowance $ 4,000,Sales Discount $ 2,500, Purchases $ 180,000, Bad Debits $ 4,000, Transport out $ 1,250, Rent Revenue $ 2,000.
Note: Inventory at the end are estimated as $ 7,500.
Required: - 1. Prepare the Trading Account and Trading Statement. 2. Calculate the Gross Profit or (Gross Loss) from the above information.
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EXAMPLRS
Profit and Loss Account
Trading a/c (Gross Loss) xxx Trading a/c (Gross Profit) xxx
Freight out xxx Rent Revenue xxx
Rent xxx Investment Revenue xxx
Salaries xxx Gain (Profit) on Sale of F. A. xxx
Advertising xxx Commission Earned xxx
Sales Commission xxx
Insurance Sales xxx
Repairs xxx
Stationary xxx
Interest Expenses xxx
Bad Debits xxx
Loss on sale of fixed assets xxx
Depreciation xxx
Wages xxx
Bank Charges xxx
Capital (Net Profit) xxx Capital (Net Loss) xxx
XXX XXX
Note 1: - If the credit side is more than the debit side the result is net profit (income): The Entry is as follows:
From: Profit & Loss a/c xxx
To: Capital a/c xxx
Note 2: - If the debit side is more than the credit side the result is net loss: The Entry is as follows:
From: Capital a/c xxx
To: Profit & Loss a/c xxx
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Profit and Loss Statement
For the Year Ended Dec., 31
Gross Profit xxx
Add: Other revenue:
Rent Revenue xxx
Investment Revenue xxx
Gain on Sale of Fixed Assets xxx
Commission Earned xxx xxx
Sub Total xxx
Deduct: Operating Expenses:
Marketing Expenses
Advertising xxx
Sales Commission xxx xxx
Administrative Expenses
Rent xxx
Salaries xxx
Repairs xxx
Insurance xxx
Stationary xxx xxx
Financing Expenses
Interest xxx
Bad Debits xxx xxx (xxx)
Total Operating Income xxx
Extra – Ordinary Items
Loss on Sale of Fixed Assets (xxx) -
Net Income xxxx
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EXAMPLE: - The following balances are extracted from the ledger of the Ahmed Company at the end of the month ended October 31st, 2020.
Prepaid Expense ($ 11,000), Commission Earned ($ 13,000), Advertising Expense ($ 12,000), Rent Income ($ 10,000), Trading (Gross Profit) ($ 23,000), Gain on Sale of Equipment ($ 20,000), Salaries Expense ($ 36,000), Stationary ($ 8,000), Bad Debits ($ 6,000), Telehpone Expense ($ 1,000), Investment Revenue ($ 4,000), Sales Commission ($ 4,000), Interest Expenses ($ 4,000), Rent Expense ($ 5,000), Repairs ($ 7,000), Sales ($ 20,000), Ending Inventory ($ 2,500), Purchases Discount ($ 1,750), Depreciation Expenses ($ 3,000).
Required: - Prepare Profit and Loss Account & Profit and Loss Statement for the Month Ended October 31st, 2020.
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EXAMPLES Balance Sheet as at Dec., 31 Assets Current Assets: Cash xxx Bank xxx Cash equivalent xxx Short Term Investment xxx Notes Receivable N/R xxx Accounts Receivable A/R xxx Ending Inventory xxx Prepaid Expenses xxx Accrued Revenue xxx Total of Current Assets xxxx
Fixed Assets: Furnitures xxx Automobiles xxx Machinary xxx Buildings xxx Lands xxx Total of Fixed Assets xxxx Total Assets xxxx
Liabilities Short Term Liabilities: Notes Payable N/P xxx Accounts Payable A/P xxx Short Term Loans xxx xxxx
Long Term Liabilities:
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Long Term Loan Payable xxx Mortgage – Payable xxx xxxx Total Liabilities xxxx Owner's equity Capital 1/1 xxx + Net Income xxx - Net Loss (xxx) - With Drawals (xxx) Capital 31/12 xxxx Total Liabilities and Owner Equity xxxx ...... EXAMPLE: - the following are balances extracted from the ledger of Ali Trading Company at the end of the year ended October 31, 2020. (Values are in Dollar):
Cash 8,000 Bank 12,000 Beginning Inventory 10,000 With Drawals 3,600 Notes Receivable 6,000 Accounts Receivable 16,000 Short Term Investment 10,000 Insurance 4,600 Bad Debits 800 Furniture 17,000 Loss on Sale of Fixed Assets 1,000 Prepaid Expenses 4,000 Accrued Revenues 2,000 Machinery 8,000 Buildings 40,000 Automobiles 25,000
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Lands 10,000 Net Income 11,600 Ending Inventory 14,000 Account Payable 18,000 Mortgage Payable 24,000 Notes Payable 22,000 Short Term Loans 10,000 Long Term Loan Payable 20,000 Capital 70,000 Required: - Prepare Balance Sheet as at October 31, 2020. ……………………………………………………………………………………….
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Example: - the following trial balance for Nabz Company at December 31, 2019. Nabz Company Trial balance for the year ended December 31, 2019. Account Titles Debit $ Credit $ Cash 1,200 Debtors 7,000 Opening Stock 15,000 Office Supplies Expenses 3,000 Insurance Expenses 5,900 Furniture 5,500 Cars 7,000 Salaries Expense 43,000 Personal Drawings 4,000 Sale Returns 6,300 Purchases 238,400 Purchases Expenses 3,000 Rent Expense 19,000 Advertising Expense 1,700 Investment 39,000 Creditors 16,000 Capital 42,600 Sales 321,000 Purchase Returns 5,000 Investment Return 14,400 Total $ 400,000 $400,000 At December 31, 2019 closing stock valued for $ 21,000. Required: - 1) Prepare the Trading Account for the year ended at December 31, 2019. 2) Prepare Profit & Loss Account for the year ended at December 31, 2019
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3) Prepare Balance Sheet as at December 31, 2019.
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Example: - the following are balances extracted from the ledger of Ali Trading Company at the end of the year ended December 31, 2019. (Values are in Dollar): -
Purchases 60,000
Rent 4,400
Salaries 5,200
Cash 8,000
Bank 12,000
Beginning Inventory 10,000
With Drawals 3,600
Advertising 2,800
Notes Receivable 6,000
Accounts Receivable 16,000
Sales Commission 600
Short Term Investment 10,000
Repair 2,200
Sale Returns 1,000
Insurance 4,600
Sale Allowances 600
Bad Debits 800
Furnitures 17,000
Loss on Sale of Fixed Assets 1,000
Prepaid Expenses 4,000
Accrued Revenues 2,000
Sales Discount 400
Interest Expenses 400
Stationary 1,400
Machinery 8,000
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Buildings 40,000
Automobiles 25,000
Lands 10,000
Account Payable 18,000
Mortgage Payable 24,000
Notes Payable 22,000
Purchases Expenses 9,000
Purchases Discount 1,000
Short Term Loans 10,000
Purchase Allowances 1,600
Long Term Loan Payable 20,000
Rent Revenue 2,000
Investment Revenue 3,000
Purchase Returns 2,400
Capital 70,000
Sales 92,000
Notes: - Goods at the end are estimated as $14,000.
Required: - 1. Prepare trading account, Trading Statement.
2. Prepare Profit & Loss account, Profit & Loss Statement.
3. Prepare Income Statement.
4. Prepare Balance Sheet.
…………………………………………………………………………………
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Final Accounts for Services Sector:
Example: - The following Trail Balance for Arass Laundry, on May 31, 2020.
Account Titles Debit $ Credit $
Cash 6,900
Bank 6,000
Rent expense 1,200
Laundry Equipment (net) 2,500
Depreciation- Laundry- Equipment Exp. 150
Insurance Expense 1,350
Advertising Expense 650
Personal Drawings 600
AL-Saffer-Hotel 2,000
Capital 15,000
AL-Takhai-News paper 750
Services Revenue 5,600
Total 21,350 21,350
Required: -
1. Profit & Loss Account for Period Ended May 31st, 2020.
2. Balance Sheet as at May 31st, 2020.
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