CHAPTER TWO

FINAL ACCOUNTS (FINANCIAL STATEMENTS) FOR

DIFFERENT SECTORS

Table of Contents

INTRODUCTION ...... 2

Financial : ...... 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) ...... 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:

. is a systematic way of recording the financial transactions of business. Its purpose is the preparation of , Statement of Changes in

Equity (statement of Capital), Balance sheet, & Statement of 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 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 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 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 (opening Stocks) xxx Sales (Sales ) 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 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 ($ 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), 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 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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