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BALANCE SHEET

The balance sheet is a statement of the financial position of a firm at a particular instant, usually the end
of the accounting period of the firm: its year end. In economic terms, it may be regarded as a statement
of the wealth of the firm at a particular time, whereas the profit and loss account is a statement of the
change in the wealth of the firm over a stipulated period, hence the ‘snapshot’ (financial photograph)
concept of the balance sheet.

A balance sheet comprises two distinct sections, one detailing the assets of the firm and the other
detailing the liabilities, including owners’ investment. Traditionally, the liabilities (capital from owners,
reserves, creditors, etc.) comprised the left-hand side of the balance sheet and the assets (cash,
investments, buildings, etc.) comprised the right-hand side. The modern layout which is linear, details
liabilities beneath assets.

Moreover, following detailing the fixed assets as tangible and intangible, the ‘assets’ section includes a
statement of current assets less current liabilities to give the net current assets or the net working
capital before arriving at the statement of the firms’ total assets less its current liabilities (the net assets
employed). The’ liabilities’ part of the balance sheet comprises details of the owners’ investment in the
firm and of the firms’ long-term liabilities.

Whatever format of presentation is adopted, the two parts of the balance sheet must balance which
must be the case if the principles of double entry bookkeeping have been followed.

The assets of a firm comprise:

1. Tangible fixed assets e.g. building, land, plant, machinery, equipment, fixtures and fittings,
lorries and cars i.e. components of fixed cost considered subject to depreciation and/or periodic
revaluation dependent upon the circumstances. (Land and buildings tend to be periodically
revalued, plant, machinery, cars, etc., should be depreciated over their useful lives.
2. Current assets e.g. cash, debtors, stocks and work-in-progress i.e. liquid assets often of short
duration used in the operating cycle of the firm.
3. Intangible assets e.g. goodwill and patents i.e. assets of no physical substance (except the paper
of patents) whose inclusion in the assets of the firm is justified on the basis that their existence
enhances the value of the firm even if their valuation albeit in reality only educated guesses, is a
difficult exercise.

The liabilities of a firm comprise:

1. Long term liabilities e.g. debentures, long-term loans and future taxation provisions.
2. Current liabilities e.g. creditors, current taxation and proposed dividends to shareholders i.e.
those associated with the firm’s day to day operations

To determine the net working capital, the current liabilities are subtracted from the firm’s total current
assets. It is the inability of construction firms to meet their current liabilities which is the most common

BLD 416 Budgeting and Financial Control 1 Lecture Note 2 Page 1


cause of bankruptcies and liquidations within the industry; thus both solvency and liquidity are vital
considerations.

Although the profit and loss account and balance sheet are the best known financial statements, many
more statements are available. The other financial statements which are prepared periodically within a
firm are dependent upon the type and activities of the firm. Most construction firms will prepare
manufacturing accounts, trading accounts, profit and loss appropriation accounts and cash flow
statements.

A manufacturing account shows the change in value of stock of materials (and goods) to determine the
cost of those used in the year; adding the other items of direct (variable) costs determines the prime
cost of production. Addition of the indirect costs of production and adjustment of the work in progress
between the year start and end give the firm's costs of production.

EXAMPLE 1

From the following figures extracted from the Trial balance of HINADI LTD as at 31st December 2015, you
are required to determine the gross profit for the year ended 31st December 2015.

DR CR
₦ ₦
Sales 100,000
Sales returns 2,000
Opening stock of goods 5,000
Purchases 55,000
Purchases returns 1,500
Carriage inwards 2,000

In addition, closing stock determined by stock taking is valued at ₦3,500

Solution:

TRADING ACCOUNT OF HINADI LTD FOR THE YEAR ENDED 31ST DECEMBER 2015
₦ ₦ ₦ ₦
Opening Stock 5,000 Sales 100,000
Purchases 55,000 Less sales returns 2,000
Less Purchases returns 1,500
53,500 98,000
Carriage inwards 2,000
60,500
Less Closing stock 3,500
Cost of goods sold 57,000
Gross Profit 41,000
98,000 98,000

BLD 416 Budgeting and Financial Control 1 Lecture Note 2 Page 2


EXAMPLE 2

The following trial balance was extracted from the books of HINADI PLC as at 31st December 2016.

DR CR
₦ ₦
Capital 74,053
Purchases and Sales 73,130 105,460
Stock – 1 January 2016 21,600
Debtors and Creditors 12,642 15,740
Carriage inwards 290
Motor vehicles (at cost ) 27,000
Freehold property (at cost ) 52,000
Office equipment (at cost ) 10,500
Salaries 9,750
Electricity 380
Provision for depreciation:
Motor vehicles 10,300
Office equipment 2,650
Provision for bad debts 700
Insurance 290
Rate 400
Motor vehicle expenses 925
Advertisement 320
Rental income 820
Bad debt 247
Discounts 194 128
Returns 618 435
210,286 210,286
ADDITIONAL INFORMATION:

(a) Closing stock ₦25,780


(b) Accrued salaries ₦564
(c) Provision for bad debt is to be increased to ₦130
(d) Prepaid expenses:
Insurance ₦54
Rate ₦96
(e) Provision for depreciation:
Motor vehicle - 10% on cost
Office equipment - 10% on reducing balance
(f) Rental income outstanding ₦380

You are required to prepare:

(i) Trading, Profit And Loss Account for the year ended 31st December 2016.
(ii) A Balance Sheet as at that date.

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SOLUTION:

PRELIMINARY DISCUSSION

A look at the Trial balance shows that the balances of some pairs of accounts are put on the same line
e.g. purchases and sales. In two other cases of ‘Returns’ and ‘discounts’, two separate figures appear
each on the debit column and credit column. You are expected to use your knowledge of the normal
balances of account to sort out the information as follows:

(a) Since the normal balance of either purchases account or debtors account is a debit balance and the
normal balance of either sales account or creditors account is a credit balance, then the figures for
these account are:
Purchases ₦73,130; Sales ₦105,460
Debtors ₦12,642; Creditors ₦15,740
(b) Since there are two types of returns, sales return which has a debit balance and purchases return
which has a credit balance, the two figures given for returns should be interpreted to mean sales
return of ₦618 and purchases return of ₦435.
(c) Since there are two types of discounts that can appear on the Trial balance, i.e., discounts allowed
which has a debit balance and discounts received which has a credit balance, the two figures for
discounts should be interpreted as Discount Allowed ₦194 and Discount Received ₦128.
(d) Salaries Expenses (W1) = ₦9,750 +₦564 = ₦10,314
(e) Insurance and Rates (W2)

Insurance Rates
₦ ₦
Amount per Trial Balance 290 400
Less Prepayment 54 96
Amount to take to P&L 236 304

BLD 416 Budgeting and Financial Control 1 Lecture Note 2 Page 4


TRADING PROFIT AND LOSS ACCOUNT OF HINADI PLC FOR THE YEAR ENDED 31ST DECEMBER 2016
₦ ₦ ₦ ₦
Opening stock 21,600 Sales 105,460
Purchases 73,130 Less sales returns 618
Less purchases returns 435 104,842
72,695
Carriage inwards 290
Total goods available 94,505
Less closing stock 25,780
Cost of goods sold 68,805
Gross profit c/d 36,037
104,842 104,842
Discounts allowed 194 Gross profit b/d 36,037
Salaries (W1) 10,314 Discount received 128
Electricity 380 Rental income 1,200
Insurance (W2) 236
Rates (W2) 304
Motor vehicle expenses 925
Advertisement 320
Bad debts 247
Increase in provision for bad debts 130
Depreciation:
Motor Vehicles 2,700
Office equipment 785
Net Profit 20,830
37,365 37,365

BLD 416 Budgeting and Financial Control 1 Lecture Note 2 Page 5


BALANCE SHEET OF HINADI PLC AS AT 31ST DECEMBER 2016
COST ACCUMULATED NET BOOK VALUE
DEPRECIATION
₦ ₦ Fixed Assets ₦ ₦ ₦
Opening capital 74,053 Freehold property 52,000 - 52,000
Add Net profit 20,830 Motor Vehicles 27,000 13,000 14,000
94,883 Office Equipment 10,500 3,435 7,065
89,500 16,435 73,065

Current Liabilities Current Assets ₦ ₦


Creditors 15,740 Stock 25,780
Accrued Salaries 564 Debtors 12,642
16,304 Less provision for
doubtful debts 830
11,812
Accrued rental income 380
Prepaid Insurance 54
Prepaid rates 96
38,122
111,187 111,187

BLD 416 Budgeting and Financial Control 1 Lecture Note 2 Page 6


EXAMPLE 3

The following balances were extracted from the books of HINADI PREFAB LTD for the year ended 31st
December, 2015.

₦….
Stock 1 January 2015
Raw materials 51,000
Work-in-progress 16,400
Finished goods 60,700
Purchases 157,600
Carriage inwards 5,150
Factory wages 21,000
Depreciation of plant & machinery 6,000
Factory indirect labour 4,480
Purchases returns 7,000
Administrative expenses 20,000
Selling expenses 25,000
Stock 31/12/2015
Raw materials 46,200
Work-in-progress 19,450
Finished goods 71,400
Sales 257,000

Required:

Prepare the Manufacturing, Trading and Profit & Loss Account for the year ended 31st December, 2015.

BLD 416 Budgeting and Financial Control 1 Lecture Note 2 Page 7


MANUFACTURING, TRADING PROFIT AND LOSS ACCOUNT OF HINADI PREFAB LTD FOR THE YEAR
ENDED 31ST DECEMBER 2015
₦ ₦ ₦
Opening Raw Materials 51,000 Factory cost of
Purchases 157,600 Goods produced 188,980
Add: Carriage Inwards 5,150
162,750
Less: Purchases Returns 7,000
155,750
Total raw materials available 206,750
Less: Closing raw materials 46,200
Cost of raw materials consumed 160,550
Add: factory wages 21,000
Prime cost of production 181,550
Manufacturing overhead :
Depreciation of plant and machinery 6,000
Factory indirect labour 4,480
10,480
Total manufacturing cost 192,030
Add: Beginning Work-in-progress 16,400
208,430
Less: Ending Work-in-progress 19,450
Cost of goods produced 188,980 188,980

Opening stock 60,700 Sales 257,000


Add: Cost of goods produced 188,980
249,680
Less: Closing stock of finished goods 71,400
Cost of goods sold 178,280
Gross profit c/d 78,720
257,000 257,000
Administrative expenses 20,000 Gross profit b/d 78,720
Selling expenses 25,000
Net profit 33,720
78,720 78,720

BLD 416 Budgeting and Financial Control 1 Lecture Note 2 Page 8


KEY FINANCIAL TERMS USED IN ACCOUNTS

SHARES: Shares confer a stake in ownership of the company upon the shareholders. Shares are called
the equity in the company. Shares have a par, face or nominal value which represents the ownership
contribution of each share. The shareholder is entitled to the residual profits in the company after all
other commitments have been met. The share also entitles the holder to voting rights and is termed an
ordinary share. Other forms of shareholding include; those without voting rights; preference shares
which entitle the holder to a dividend in preference to ordinary shareholder; and cumulative preference
shares whereby a dividend is paid in full later to allow for those years when a dividend was not declared.
Issues of shares are of three types: a new issue for sale, a rights issue and a scrip issue. Of the three, a
scrip (or bonus) issue does not raise any new capital for the company and it is issued to existing
shareholders free of charge in proportion to their shareholding.

PROFIT: Gross profit is the total sales revenue minus costs incurred directly in the operations of the firm;
net profit is the gross profit minus interest on loan and depreciation.

DIVIDEND: The dividend is that proportion of profits (residual profits) distributed to shareholders after
all other commitments have been met.

DEPRECIATION: The assets of the business wear out in producing the goods and finally have to be
replaced. The loss in value each year represents a cost on the business to be taken out of the profit and
in theory is set aside for future replacements but depreciation is an important source of capital as it
keeps the capital in the firm which otherwise would be appropriated to owners as profits. Depreciation
applies to fixed assets and is charged on either ‘straight line’ or a reducing balance basis.

TAXATION: Taxation is influential upon the cost of capital by two means: first through the system of
corporation tax and second, through income tax levied on individuals in respect of both earned and
unearned income. In outline, corporation tax is levied on the profits of companies after the deduction of
interest payments of those companies but before any profit is available for distribution.

BLD 416 Budgeting and Financial Control 1 Lecture Note 2 Page 9