Assess the Information Needs of Different Decision Makers

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UNIT 4

Sole Traders – Financial Statements

Copyright 1995 by Thames Management Centre International. All right reserved. No part of this lecture notes may be reproduced in any form or by any means, without the permission in writing from Thames.

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4.1Introduction
At the end of the business financial year end, a set of financial statements will be prepared by the company for reporting to the owner of the business as well as for submission to the local tax authority. However, financial statements can be prepared frequently, usually monthly, for management use. Management uses the financial statements as a guide to future business operation planning and decision-makings. Financial statement prepared must comply with the provisions of the Companies Act as well as the recommendations provided by the Accounting Standards issued by the Accounting Standard Board. Non compliance with the Acts and the Accounting Standards may lead to distortion of information in the financial statements.

4.2Types of Financial Statements
Generally, most business is required to prepare a set of the following financial statements : Trading, Profit and Loss Account
Balance Sheet

4.3Trading, Profit and Loss Account
The Trading, Profit and Loss Account shows the profitability of the business at the end of its financial accounting period. The income earned is matched with the cost and expenses incurred during the period. This statement is divided into two sections:

A Trading Account shows the gross profit or loss by matching the revenue generated with the cost of goods sold. For example, if the revenue exceeds the cost of gross profit is made. A Profit and Loss Account on the other hand, shows the net profit or loss by matching the gross profit with the operating expenses incurred during the period. If the operating expenses exceed the gross profit this will result in the firm making a net loss.

4.4Format For Trading, Profit and Loss Account
Cathay Enterprise
Trading, Profit and Loss Account for the year ended 31 December 19xx Sales | | | 200,000|
Less Return inwards| | | 5,000|
| | | 195,000|
| | | |
Less Cost of Goods Sold| | | |
Opening stock | | 25,000| |
Add : Purchases | 45,000| | |
Carriage inwards| 2,000| | |
Custom duty| 1,000| | |
| 48,000| | |
Less : Return outwards| 3,000| 45,000| |
| | 70,000| |
Less : Closing stock| | 20,000| |
| | 50,000| |
Add : Wages| | 10,000| 60,000|
Gross Profit| | | 135,000|
Add : other income| | | |
Profit on sale of fixed assets| | | 1,500|
Rent received| | | 20,000|
Discount received | | | 500|
Provision for doubtful debts no longer required| | | 500| | | | 157,500|
| | | |
Less Operating Expenses| | | |
Rent | | 3,000| |
Salary| | 5,000| |
Water and Light| | 2,000| |
Stationery| | 1,000| |
Insurance | | 500| |
Depreciation| | 2,000| |
Carriage outwards| | 1,200| |
Discount allowed | | 300| |
Interest on loan| | 1,300| |
Advertisement | | 900| |
Bad debts| | 1,500| |
Postage| | 200| |
Telephone| | 400| |
Legal costs| | 1,100| |
Loss on sales of fixed assets| | 700| 21,000|
Net Profit| | | 136,400|
| | | |

4.5Balance Sheet
The Balance Sheet is a statement showing the summarised resources owned by a firm and its financial obligation as at particular date. The components constituting the Balance sheet change constantly everyday. It is like you taking a snapshot of yourself at the garden at a particular day. The make-up of yourself will change tomorrow. Hence, the use of the words, “as at” instead of “for the year ended”. Assets

The resources are the assets possessed by a business entity as at a particular date. The assets, as you have learnt in the previous lessons, are classified into two categories : fixed and current...
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