Dbs1034 biz trx week 11 income statement

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Income statement, Profit & Loss

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Dbs1034 biz trx week 11 income statement

  1. 1. Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements DBS3024 BUSINESS TRANSACTIONDBS3024 BUSINESS TRANSACTION by Stephen Ong Visiting Fellow, Birmingham City University Business School Visiting Professor, Shenzhen University
  2. 2. Today’s OverviewToday’s Overview
  3. 3. 1 - 3 Learning objectivesLearning objectives After this lecture, you should be ableAfter this lecture, you should be able toto  Explain why income statements areExplain why income statements are not part of the double entry systemnot part of the double entry system  Explain why profit is calculatedExplain why profit is calculated  Calculate cost of goods sold, grossCalculate cost of goods sold, gross profit and net profitprofit and net profit  Explain the difference betweenExplain the difference between gross profit and net profitgross profit and net profit
  4. 4. 1 - 4 Learning objectives (Continued)Learning objectives (Continued)  Explain the relationship between theExplain the relationship between the trading account and the profit and losstrading account and the profit and loss accountaccount  Explain how the trading account and theExplain how the trading account and the profit and loss account fit together toprofit and loss account fit together to create the income statementcreate the income statement  Explain how to deal with closing inventoryExplain how to deal with closing inventory when preparing the trading accountwhen preparing the trading account section of an income statementsection of an income statement  Close down the appropriate accounts andClose down the appropriate accounts and transfer the balances to the tradingtransfer the balances to the trading accountaccount
  5. 5. 1 - 5 Learning objectivesLearning objectives (Continued)(Continued)  Close down the appropriate accountsClose down the appropriate accounts and transfer the balances to the profitand transfer the balances to the profit and loss accountand loss account  Prepare an income statement fromPrepare an income statement from information given in a trial balanceinformation given in a trial balance  Make appropriate double entries toMake appropriate double entries to incorporate net profit and drawings inincorporate net profit and drawings in the capital accountthe capital account
  6. 6. 1 - 6 11 Capital and revenueCapital and revenue expendituresexpenditures
  7. 7. Joint capital & revenue expenditureJoint capital & revenue expenditure
  8. 8. 1 - 9 22 Income statementIncome statement
  9. 9. 1 - 10 The purpose of income statementsThe purpose of income statements How will knowing what profits are beingHow will knowing what profits are being made help a business?made help a business?  It will helpIt will help planplan ahead.ahead.  It will help obtainIt will help obtain loansloans from banks, otherfrom banks, other businesses and individuals.businesses and individuals.  It will tell prospective businessIt will tell prospective business partnerspartners how successful the business is.how successful the business is.  It will tell a prospectiveIt will tell a prospective purchaserpurchaser howhow successful the business is.successful the business is.  It will enable the calculation ofIt will enable the calculation of tax payabletax payable to the tax authorities.to the tax authorities.
  10. 10. 1 - 11 The formats for calculatingThe formats for calculating profitprofit Income statementIncome statement A summary that is notA summary that is not part of the doublepart of the double entry system.entry system. Trading accountTrading account Prepared to calculate thePrepared to calculate the gross profit.gross profit. Profit and loss accountProfit and loss account Prepared to calculate thePrepared to calculate the net profit.net profit. Both detail statementsBoth detail statements are part of the doubleare part of the double entry system.entry system. TheThe tradingtrading andand profit andprofit and loss accountsloss accounts are broughtare brought together and summarised totogether and summarised to createcreate the Income statement.the Income statement.
  11. 11. 1 - 12 What is gross profit?What is gross profit? Gross profitGross profit is the excess of sales revenueis the excess of sales revenue over the cost of goods sold in the period.over the cost of goods sold in the period. Note – where the cost of goods sold isNote – where the cost of goods sold is greater than the sales revenue, the resultgreater than the sales revenue, the result is a gross loss.is a gross loss. The formula isThe formula is Sales – Cost of goods sold = Gross profitSales – Cost of goods sold = Gross profit
  12. 12. 1 - 13 ActivityActivity
  13. 13. 1 - 14 What is net profit?What is net profit? Net profit is what is left of the gross profitNet profit is what is left of the gross profit after all other expenses have beenafter all other expenses have been deducted.deducted. Note – where the costs used up exceed theNote – where the costs used up exceed the gross profit plus other revenue, the resultgross profit plus other revenue, the result is ais a net lossnet loss.. The formula isThe formula is Gross profit + Any other income – ExpensesGross profit + Any other income – Expenses = Net profit= Net profit
  14. 14. 1 - 15 ActivityActivity
  15. 15. 1 - 16 How to draw up a tradingHow to draw up a trading accountaccount Step 1 – Identify the balance on all accountsStep 1 – Identify the balance on all accounts and draw upand draw up the trial balance.the trial balance. Step 2 – Obtain theStep 2 – Obtain the closing inventoryclosing inventory figurefigure by valuing the inventory at the end of theby valuing the inventory at the end of the year.year. Step 3 – Calculate the cost of goods soldStep 3 – Calculate the cost of goods sold using the formula:using the formula: Opening inventoryOpening inventory + Purchases+ Purchases –– Closing inventoryClosing inventory = Cost of goods sold= Cost of goods sold
  16. 16. 1 - 17 How to draw up a tradingHow to draw up a trading account (Continued)account (Continued) Step 4 – Calculate the Gross profit usingStep 4 – Calculate the Gross profit using the formula:the formula: SalesSales –– Cost of goods soldCost of goods sold = Gross profit= Gross profit Step 5 –Step 5 – Close the accountsClose the accounts that shouldthat should appear in theappear in the Trading accountTrading account byby transferring their balances to thattransferring their balances to that account.account.
  17. 17. 1 - 18 ActivityActivity Step 1 – completed.Step 1 – completed. Step 2 – assume the value of closingStep 2 – assume the value of closing inventory is RM3,000.inventory is RM3,000. Step 3 – Cost of goods sold calculationStep 3 – Cost of goods sold calculation Opening inventoryOpening inventory 00 + Purchases+ Purchases 29,00029,000 −− Closing inventoryClosing inventory 3,0003,000 Cost of goods soldCost of goods sold 26,00026,000
  18. 18. 1 - 19 Activity (Continued)Activity (Continued) Step 4 – Gross profit calculationStep 4 – Gross profit calculation SalesSales 38,50038,500 - Cost of goods sold- Cost of goods sold -26,000-26,000 Gross profitGross profit 12,50012,500 Step 5 – Close the relevant ledgerStep 5 – Close the relevant ledger accounts.accounts.
  19. 19. 1 - 20 How to close the ledger accountsHow to close the ledger accounts when drawing up a trading accountwhen drawing up a trading account  Debit the balance of the sales accountDebit the balance of the sales account (to close it) and credit the trading(to close it) and credit the trading account.account.  Credit the balance of the purchasesCredit the balance of the purchases accountaccount (to close it) and credit the(to close it) and credit the trading account.trading account.  Enter the valuation for closing inventoryEnter the valuation for closing inventory into the double entry accounts byinto the double entry accounts by debiting the closing inventory accountdebiting the closing inventory account and crediting the trading account.and crediting the trading account.
  20. 20. 1 - 21 How to draw up a profit and lossHow to draw up a profit and loss accountaccount Step 1 – Open a profit and loss accountStep 1 – Open a profit and loss account and transfer in the gross profit.and transfer in the gross profit. Step 2 – Close the income accounts andStep 2 – Close the income accounts and credit the profit and loss account withcredit the profit and loss account with any amounts.any amounts. Step 3 – Close the expense accounts andStep 3 – Close the expense accounts and debit the profit and loss account withdebit the profit and loss account with any amounts.any amounts.
  21. 21. 1 - 22 Drawing up the income statementDrawing up the income statement The figures from theThe figures from the trading accounttrading account andand profitprofit and loss accountand loss account will nowwill now be entered into the incomebe entered into the income statement using astatement using a prescribed template.prescribed template.
  22. 22. 1 - 23 The format for the income statementThe format for the income statement Income statement for the year ending 31 December 2012Income statement for the year ending 31 December 2012 RMRM RMRM SalesSales XX Less Cost of goods soldLess Cost of goods sold PurchasesPurchases XX Less closing inventoryLess closing inventory (X)(X) (X)(X) Gross profitGross profit XX Less expensesLess expenses (X)(X) Net profitNet profit XX
  23. 23. 1 - 24 B. Swift’s income statementB. Swift’s income statement
  24. 24. 1 - 25 The effect of net profit on the capitalThe effect of net profit on the capital accountaccount We have a debit on the profit and lossWe have a debit on the profit and loss account of RM8,000 and this isaccount of RM8,000 and this is credited tocredited to the capital accountthe capital account, to increase the capital, to increase the capital figure in the business.figure in the business. In the same way, theIn the same way, the drawingsdrawings are alsoare also transferred in to thetransferred in to the capital account tocapital account to reducereduce the capital figure in the business.the capital figure in the business. Note – in the case of aNote – in the case of a net lossnet loss, the capital, the capital figure is decreased.figure is decreased.
  25. 25. 1 - 26 Learning outcomesLearning outcomes You should have now learnt:You should have now learnt:  WhyWhy income statementsincome statements are not part of theare not part of the double entry systemdouble entry system  Why profit is calculatedWhy profit is calculated  How to calculate cost of goods sold, grossHow to calculate cost of goods sold, gross profit and net profitprofit and net profit  The double entries required in order toThe double entries required in order to closeclose off the relevant expense and revenueoff the relevant expense and revenue accounts at the end of a periodaccounts at the end of a period and postand post how to post the entries to the tradinghow to post the entries to the trading account and the profit and loss accountaccount and the profit and loss account
  26. 26. 1 - 27 Learning outcomes (Continued)Learning outcomes (Continued)  How to deal withHow to deal with inventoryinventory at the end of aat the end of a periodperiod  How to prepare anHow to prepare an income statementincome statement from afrom a trial balancetrial balance  How toHow to transfer the net profit and drawings totransfer the net profit and drawings to the capital accountthe capital account at the end of a periodat the end of a period  That balances on accounts not closed off inThat balances on accounts not closed off in order to prepare the income statement areorder to prepare the income statement are carried down to the following period, that thesecarried down to the following period, that these balances representbalances represent assets, liabilities andassets, liabilities and capitalcapital, and that they are entered in the, and that they are entered in the statement of financial positionstatement of financial position
  27. 27. Resources : Core ReadingResources : Core Reading  Wood, Frank and Robinson, SheilaWood, Frank and Robinson, Sheila (2009)(2009) Bookkeeping and AccountsBookkeeping and Accounts ,7,7thth Edition, Pearson/ FT Prentice HallEdition, Pearson/ FT Prentice Hall  Wood, Frank and Sangster, Alan (2012) Business Accounting ,12th Edition, Pearson/ FT Prentice Hall  Fortes, Hilary (2011) Accounting Simplified , Pearson/ FT Prentice Hall
  28. 28. QUESTIONS?QUESTIONS?

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