This document introduces the key financial statements prepared at the end of an accounting period: the trading account, profit and loss account, and balance sheet. It explains that the trial balance is prepared first using debit and credit columns to show asset/expense and liability/income balances. The trading account calculates gross profit by subtracting the cost of goods sold from net sales. The profit and loss account then calculates net profit by subtracting total expenses from total profits including gross profit and other income. Finally, the balance sheet presents the financial position by showing assets, liabilities, and capital/net assets.

1. INTRODUCTION TO FINAL ACCOUNTS The transition from the Trial Balance to the financial statements

2. Purpose of Preparing Financial Statements Financial statements are prepared primarily for the business owner; but may be used by any interested third party with the owner’s consent. Owner needs to know what returns were gained on his investment. Buyers need to know if the business is a profitable going concern. Investors/Partners need to know if it is worth the opportunity costs. Banks/Lenders need to know if the business is able to repay the debt/interest. Creditors need to know if they can recover their money if the business liquidates. Taxes have to be calculated and paid into the government treasury.

3. Financial statements are sometimes refer to as Final Accounts Financial Statements constitute – Trading Account Profit & Loss account Balance Sheet

4. The Trial Balance Is a list of all the balances in the ledgers at the end of the period in review. It uses two monetary columns [debit, credit] The debit column displays the assets and paid up expenses [A + E ] as at the date of review; The credit column displays the liabilities and income gained [L + C] as at the date of review Trial Balance formula.. A + E = L + C

5. Trial Balance Accounts on the books with balances TB Assets Expenses (paid up) A + E Liabilities Revenues L + R Account name debit credit

6. Trial Balance as on … 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] Assets, Expenses  Liabilities, Income

7. Creditors’ figure (the summary total of the amounts owing to the suppliers recorded in this ledger) Debtors’ figure (the summary total of the amounts owed by the customers recorded in this ledger) Posting – transfer data from the journals [Day Books] to the ledgers Balance off – the act of finding the figure that makes both side equal Debit – the act of recording data on the left hand side of the account Credit – the act of recording data on the right hand side of the account

8. The Trading Account This account is used to calculate the gross profits Gross profits = net sales less cost of sales Net Sales = total sales less sales returns (returns inward) Cost of Sales = cost of goods available less closing stock Cost of Goods available = opening stock plus net purchases Net Purchases = total purchases plus carriage in less purchases returns (returns outward)

9. The Trading Account

10. The Profit & Loss Account This account is used to calculate the net profits Net profits = Total profits less Total Expenses Total Profits = gross profits plus other revenue/income Other Income = any non-trading revenues received Total Expenses = any costs incurred in order to make a profit

11. The Profit & Loss Account

12. The Balance Sheet This shows the financial status of the business at a given date. It reveals the value of the assets, liabilities, and capital... such that -: Net Capital = Net Assets less long term liabilities [C = A – L] Net Assets = Fixed Assets plus Working Capital Working Capital = Current Assets less Current Liabilities Long term Liabilities = debts which become due after 1 year OR Net Capital = opening capital plus net profits less drawings