Introduction to final accounts


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Introduction to final accounts

  1. 1. INTRODUCTION TO FINAL ACCOUNTS<br />The transition from the Trial Balance to the financial statements<br />
  2. 2. Purpose of Preparing Financial Statements<br /> Financial statements are prepared primarily for the business owner; but may be used by any interested third party with the owner’s consent.<br />Owner needs to know what returns were gained on his investment.<br />Buyers need to know if the business is a profitable going concern.<br />Investors/Partners need to know if it is worth the opportunity costs.<br />Banks/Lenders need to know if the business is able to repay the debt/interest.<br />Creditors need to know if they can recover their money if the business liquidates.<br />Taxes have to be calculated and paid into the government treasury.<br />
  3. 3. Financial statements are sometimes refer to as Final Accounts<br />Financial Statements constitute –<br />Trading Account<br />Profit & Loss account<br />Balance Sheet<br />
  4. 4. The Trial Balance<br />Is a list of all the balances in the ledgers at the end of the period in review.<br />It uses two monetary columns [debit, credit]<br />The debit column displays the assets and paid up expenses [A + E ] as at the date of review;<br />The credit column displays the liabilities and income gained [L + C] as at the date of review<br />Trial Balance formula.. A + E = L + C<br />
  5. 5. Trial Balance<br />Accounts on the books with balances<br />TB <br />Assets<br />Expenses (paid up)<br />A + E<br />Liabilities<br />Revenues<br />L + R<br />Account name<br />debit<br />credit<br />
  6. 6. Trial Balance as on …<br />The Bal c/d on the account should be posted to the opposing column on the Trial Balance [eg if the Cash bal c/d fell on the credit side then it should be recorded in the debit column of the Trial Balance]<br />Assets, Expenses  Liabilities, Income<br />
  7. 7. Creditors’ figure<br />(the summary total of the amounts owing to the suppliers recorded in this ledger)<br />Debtors’ figure<br />(the summary total of the amounts owed by the customers recorded in this ledger)<br />Posting – <br />transfer data from the journals [Day Books] to the ledgers<br />Balance off – <br />the act of finding the figure that makes both side equal<br />Debit – <br />the act of recording data on the left hand side of the account<br />Credit – <br />the act of recording data on the right hand side of the account<br />
  8. 8. The Trading Account<br />This account is used to calculate the gross profits<br />Gross profits = net sales less cost of sales<br />Net Sales = total sales less sales returns (returns inward)<br />Cost of Sales = cost of goods available less closing stock<br />Cost of Goods available = opening stock plus net purchases<br />Net Purchases = total purchases plus carriage in less purchases returns (returns outward)<br />
  9. 9. The Trading Account<br />
  10. 10. The Profit & Loss Account<br />This account is used to calculate the net profits<br />Net profits = Total profits less Total Expenses<br />Total Profits = gross profits plus other revenue/income<br />Other Income = any non-trading revenues received<br />Total Expenses = any costs incurred in order to make a profit<br />
  11. 11. The Profit & Loss Account<br />
  12. 12. The Balance Sheet<br /> This shows the financial status of the business at a given date.<br /> It reveals the value of the assets, liabilities, and capital... such that -:<br />Net Capital = Net Assets less long term liabilities [C = A – L]<br />Net Assets = Fixed Assets plus Working Capital<br />Working Capital = Current Assets less Current Liabilities<br />Long term Liabilities = debts which become due after 1 year<br />OR<br />Net Capital = opening capital plus net profits less drawings<br />