From Trial Balance to Financial

Statements.
• Upon completion of this topic,
you will be able to:
• prepare a statement of financial
position and statement of profit
or loss and other comprehensive
income (or extracts) from given
information
 Recap . . .
 Collecting, recording, summarising & communicating. . . financial
information . . . about an organisation . . . . .users make decisions
 Types of Organisations = sole traders, partnerships, limited
companies etc
 Users = owners (investors), lenders, trade contacts, analysts etc
 Assets = Capital + Liabilities
 Income - Expenses = Profits (or loss)
 Purchases (good bought for resale)
 Drawings (money taken out of business by owner)
 Double entry book-keeping system, nominal ledger - T accounts
 John - Trial balance at the end of September

Account Dr (£) Cr (£) Type of balance

(Column not normally shown -
it's here for your info only)

Equipment 3,500 Asset

Receivable 1,600 Asset
Cash 5,850 Asset
Payable 1,000 Liability
Capital 10,000 Capital
Drawings 200 Capital (reduction)
Sales 4,250 Income
Purchases 4,000 Expenses
Wages 100 Expenses
--------- ---------
15,250 15,250
--------- --------

Note: The total debit balances = total credit balances.

Financial statements - preparation
 The figures in the trial balance t form the basis for the
figures which appear in the financial statements.
 You then just need to remember which accounts go in
which statement and in what order they appear.
 Income statement - income & expenses
 Statement of financial position - assets, liabilities &
capital
 Work out which account goes where and tick off on TB.
 Practice makes perfect!
 Financial statements
 The main financial statements are:
 Income statement (or profit & loss account)
 Statement of financial position (or balance sheet)

 Financial statements are:

 required on an annual basis.

 historic - looking back at the last year.

 vital to helping external users make decisions, e.g.

should they invest, lend or trade with the business.
 Income statement
 Measures the performance of business in an
accounting period (usually one year).

 Profit (or loss) = Income – Expenses

 Note - profits (or losses) belong to the owner

of the business and will increase (or decrease)
capital. There is therefore a link to the other
main financial statement, The statement of
financial position.
 Income Statement (cont)
 An important distinction is the difference
between gross and net profit:

 Gross Profit (profit on trading)

 = Sales - cost of goods sold

 Net Profit (profit after all other expenses)

 = Gross profit - other expenses
 Income Statement
(Gross and net profit)
Income Statement, month ending 30 Sept
Trial Balance - Mr Green
£’s
Account Dr (£) Cr (£) Sales

Cost of sales
Equipment 3,500 Purchases
Receivable 1,600 ----------
Cash 5,850 Gross Profit
Payable 1,000
Capital 10,000 Other expenses
Drawings 200
Sales 4,250 Wages
Purchases 4,000
---------
Wages 100
--------- ---------
Net Profit
15,250 15,250
 Income Statement
(Gross and net profit)
Income Statement, month ending 30 Sept
Trial Balance - Mr Green
£’s
Account Dr (£) Cr (£) Sales
4,250

Equipment 3,500 Cost of sales

Receivable 1,600 Purchases 4,000
Cash 5,850 ----------
Payable 1,000 Gross Profit 250
Capital 10,000
Drawings 200 Other expenses
Sales
4,250 Wages 100
Purchases 4,000 ---------
Wages 100
Net Profit 150
--------- ---------
15,250 15,250
 Income Statement (Cost of Sales)
 At any point in time, a business is likely to have
inventory (or stock). This is goods bought for
resale which has not yet been sold.
 Remember, sale and purchase of goods are not
posted to inventory account throughout the year.
 At the year end, inventory is counted and valued
(at cost price).
 To calculate 'Cost of sales' an adjustment is
required for opening and closing inventory.
 Income Statement
(Cost of good sold)
Sales (what you have sold in the year) £xx

Less 'Cost of goods sold'?

Opening inventory (what you had at start of year) £xx
Add purchases (what you purchased in the year) £xx
Less closing inventory (£xx) £xx

= Gross Profit (the profit made on trading, ie buying & selling) £xx

Note - accountants sometimes use brackets to indicate 'minus' but their use is
inconsistent!
Income Statement (Cost of Sales)
 Continuing the Mr Green example, let's
assume that closing inventory is valued at
£1,000 at the end of September.
 His opening inventory will be zero as he only
started to trade on 1 September.
 Adjust the trial balance for the closing
inventory and produce an updated Income
Statement.
 Income Statement
(Cost of sales)
Income Statement, month ending 30 Sept
Trial Balance - Mr Green
£’s
Account Dr (£) Cr (£) Sales

Cost of sales
Equipment 3,500 Opening inventory
Receivable 1,600 Add purchases
Cash 5,850 Less closing inventory
Payable 1,000 ----------
Capital 10,000
Drawings 200
Sales Gross Profit
4,250
Purchases 4,000
Other expenses
Wages 100
--------- ---------
15,250 15,250 Wages
---------
Adjustment for closing inventory Net Profit

Inventory 1,000
Cost of sales 1,000
 Income Statement
(Cost of sales)
Income Statement, month ending 30 Sept
Trial Balance - Mr Green
£’s
Account Dr (£) Cr (£) Sales
4,250

Equipment 3,500 Cost of sales

Receivable 1,600 Opening inventory 0
Cash 5,850 Add purchases 4,000
Payable 1,000 Less closing inventory (1,000)
Capital 10,000 ----------
Drawings 200 3,000
Sales
4,250 Gross Profit 1,250
Purchases 4,000 Other expenses
Wages 100
--------- --------- Wages 100
15,250 15,250
---------
Adjustment for closing inventory
Net Profit 1,150

Inventory 1,000
Cost of sales 1,000
 Cost of goods sold - example
Given the following information, calculate the
Gross Profit made by the bookshop:

At the start of the year, books in stock were valued

at £6,000. During the year new books were bought
at a cost of £50,000. The bookshop made sales
totalling £100,000 in the year. Books in stock at the
end of the year were valued at £10,000
 Answer
Sales 100,000

Cost of goods sold

Opening inventory 6,000
Purchases 50,000
Less Closing inventory (10,000) 46,000

Gross Profit 54,000

 Statement of financial position
 Shows financial position of a business- i.e. the
resources it controls (assets), its obligations
(liabilities) and the residual interest of its
owners (capital) at a point in time.

 Format is either:
 Assets = Capital + Liabilities (we'll be using this)
 Assets – Liabilities = Capital

 Assets & Liabilities are sub-divided in to:

 Non current
 Current
 Assets - categories
 Non Current Assets: Held for long term use in the
business, with a view to earning income or making
profits from its use. Examples include Land &
Buildings, Plant & Machinery, Furniture and
Equipment, Motor Vehicles

 Current Assets - Held for short term. Intention is to

turn in to cash. Examples include Cash/Bank,
Inventory (stock), Receivables (debtors)
 Liabilities - categories
 Non Current Liability - debts payable after one
year. Typical example would be a bank loan.

 Current Liability – debts payable within one

year. Examples include Payables (creditors),
Bank overdraft & Loans ( if repayable within
year)
 Recap. .
 Any profits made belong to the owner(s) of the business. Profits
therefore increase capital.

 Capital = Resources introduced by owner (capital)

add
* Profit (or minus loss)
less
** Resources taken out by owner (drawings)

* The balance on the income statement ledger account is transferred

to the capital account
** The balance on the drawings account is transferred to the capital
account.
Mr Green example - we can now continue with this
example. We produced an Income Statement, now let's go on to
produce a statement of Financial Position
Income Statement, month ending 30 Sept
Trial Balance - Mr Green
£’s
Account Dr (£) Cr (£) Sales revenue 4,250

Cost of sales
Equipment 3,500 Opening inventory 0
Receivable 1,600 Add purchases 4,000
Cash 5,850 Less closing inventory (1,000)
Payable 1,000 ----------
Capital 10,000 3,000
Drawings 200
Sales Gross Profit 1,250
4,250
Purchases 4,000
Other expenses
Wages 100
--------- ---------
15,250 15,250 Wages 100
---------
closing inventory is 1,000 Net Profit 1,150
 Mr Green Financial Statements

Income Statement for the month ended 30 Sept Statement of Financial Position as at 30 Sept
£’s £’s
Sales revenue 4,250 Non-current assets
Cost of goods sold Equipment
Opening inventory 0 ---------
Purchases 4,000
Closing inventory (1,000) Current assets
-------- Inventories (stocks)
3,000 Receivables
Cash
Gross profit 1,250
--------- ---------
Wages 100 TOTAL ASSETS
-------- ======
NET PROFIT FOR THE PERIOD 1,150
===== EQUITY & LIABILITIES

Trial Balance - Mr Green EQUITY

Account Dr (£) Cr (£) Capital
Profit (Loss) [for the period]
Drawings [
Equipment 3,500 ---------
Receivable 1,600 LIABILITIES
Cash 5,850
Payable 1,000 Non current liabilities ---------
Capital 10,000
Drawings 200
Sales 4,250 Current liabilities
Purchases 4,000 Payables
Wages 100 ----------
--------- --------- TOTAL EQUITY & LIABILITIES
15,250 15,250 ======
 Mr Green Financial Statements

Income Statement for the month ended 30 Sept Statement of Financial Position as at 30 Sept
£’s £’s
Sales revenue 4,250 Non-current assets
Cost of goods sold Equipment 3,500
Opening inventory 0 ---------
Purchases 4,000 3,500
Closing inventory (1,000) Current assets
3,000 Inventory 1,000
Receivables 1,600
-------- Cash 5,850 8,450

--------- ---------
Gross profit 1,250 TOTAL ASSETS 11,950
operating expenses ======
Equity
Wages 100 Opening [at start of period] 10,000
-------- Introduced [during the period -
NET PROFIT FOR THE PERIOD 1,150 Profit /(Loss) [for the period] 1,150
===== Drawings (200)
---------
Trial Balance - Mr Green 10,950
Account Dr (£) Cr (£)
Non current liabilities
Equipment 3,500
Current liabilities
Receivable 1,600
Payables 1,000
Cash 5,850
----------
Payable 1,000
TOTAL CAPITAL & LIABILITIES 11,950
Capital 10,000
=====
Drawings 200
Sales 4,250
Purchases 4,000
Wages 100
--------- ---------
15,250 15,250