PREPARATION OF FINANCIAL

STATEMENTS
THE PURPOSE OF INCOME STATEMENTS
How will knowing what profits are being
made help a business?

It will help plan ahead.

It will help obtain loans from banks, other
businesses and individuals.
It will tell prospective business partners how
successful the business is.
It will tell a prospective purchaser how successful
the business is.
It will enable the calculation of tax payable to the
tax authorities.
PREPARING INCOME STATEMENT

Income statement is not a T-account

It has a standard format which is set by the
accounting standard bodies
WHAT IS GROSS PROFIT?
Gross profit (GP) is the excess of sales revenue over
the cost of goods sold in the period.

Note: If the cost of goods sold is greater than the sales

revenue, the result is a gross loss.

The formula for calculating GP is:

Sales Cost of goods sold = Gross profit
WHAT IS NET PROFIT?
Net profit is what is left of the gross profit after all
other expenses have been deducted.

Note: If the costs used up exceed the gross profit plus

other revenue, the result is a net loss.

The formula is
Gross profit + any other income other expenses
= Net profit
ACTIVITY (CONTINUED)

Trading
account
section
of IS
OTHER CONSIDERATIONS
What about the returns?
BALANCE SHEET

Definition

The Balance Sheet is a

list of balances arranged according to
whether they are assets, capital or
liabilities and so depict the financial
situation on a specific date.
THE BALANCE SHEET

The balance sheet is also known as the statement

of financial position.
The balance sheet contains details of assets,
liabilities and capital all those accounts with
balances that were not included in the income
statement.
THE FORMAT FOR A BALANCE SHEET

Non-current assets assets that are:

Not bought primarily to be sold.

Bought to be used in the business.

Are expected to be of use in the business for a long

time.

Non-current assets are listed first in the balance sheet

starting with those the business will keep the longest.
 The format for a balance sheet
(Continued)

Current assets are assets that are:

Likely to change in the short term and certainly within
12 months.
Include: items held for resale, accounts receivable,
cash in the bank and in hand.

Current assets are listed in increasing order of

liquidity.
 The format for a balance sheet
(Continued)

Current liabilities:

Liabilities that have to be paid within a year of the

date of the balance sheet .
Examples include bank overdrafts and accounts
payable.
 The format for a balance sheet
(Continued)

Non-current liabilities:

Liabilities that have to be paid more than a year after

the date of the balance sheet .
Examples include bank loans and loans from other
businesses.
Format of Balance Sheet in Frank Woods
book

Non-current assets
+
Working capital (Current Assets-
Current liabilities)
=
Net Assets

Equity and Reserves

+
Non-current liabilities
=
Total equity and non-current
liabilities
RECOMMENDED FORMAT FOLLOWING THE
IFRS
Company name
Statement of financial position as at (accounting year end date)

Non-current assets
+
Current assets
=
Total assets

Should be
Capital
the same
+
Non-current liabilities
+
Current liabilities
=
Total equity and liabilities
A SIMPLE EXERCISE
Using the trial balance as at 31 December 2016 below, prepare income statement and
balance sheet for Sunrise Enterprise.

Debit Credit
(RM) (RM)
Capital 28,150
Bank 20,000
Cash 5,000
Office fixtures and fittings 25,000
Inventory (1 January 2016) 1,000
Accounts Payable and Receivable 25,000 14,000
Purchases and sales 21,500 55,000
Returns 1,000 500
Discounts 150 200
Carriage inwards 300
Rent 16,000
Insurance 8,000
Commission received 1,500
Miscellaneous expenses 1,800
Drawings 4,600
5 years Loan 30,000
Total 129,350 129,350
Closing inventory as at 31 December 2016 amounted to RM5,000
REMEMBER!

Items relating to the category of assets, capital

and liabilities will be in the Balance Sheet.
Items related to Revenue and Expenses will be in
the Income Statement (IS)
 SUNRISE ENTERPRISE
INCOME STATEMENT
FOR THE YEAR ENDING 31 DECEMBER 2016
RM RM
Sales 55000
Less : Return Inwards (1000)
54000
Less: COGS
Opening Inventory 1000
Add: Purchases 21500
Carriage Inwards 300
22800
Less: Return Outwards (500)
22300
Closing inventory (5000) 17300
Gross profit 36700
Add: Other revenue
Commission received 1500
Discount received 200 1700
38400
Less: Expenses
Discount Allowed 150
Rent 16000
Insurance 8000
Misc expenses 1800 (25950)
(Net Loss)/ NetProfit 12450
 SUNRISE ENTERPRISE
BALANCE SHEET
AS AT 31 DECEMBER 2016

RM RM
Non-current assets
Office Fixtures and fittings 25000

Current Assets
Inventory 5000

Accounts receivable 25000

Bank 20000

Cash 5000 55000

Total Assets 80000

Capital 28150
Add: Net Profit 12450
Drawings (4600)
36000
Non- Current liabilities
5 year loan 30000
Current Liabilities
Accounts payable 14000
Total capital and liabilities 80000