Accounting | Financial Statements

 

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Income Statement

this is a document which shows the calculation of the profit or the loss earned by a business.

An Example of an Income Statement

This Business is fictitious. Tairira is a sole trader who owns a business called Tyree’s Goods. The financial year of Tyree’s Goods (TG) ends on 1 January. The following balances were extracted from her books on 1 January 2021.

	$
Revenue	500 000
Purchases	173 440
Returns inwards	12 480
Returns outwards	7 640
Insurance	5440
Administration expenses	56 800
Electricity	8 160
Advertising	22 000
Rent receivable	12 000
TG Staff salaries	47 760
General expenses	11 680
Non-current assets: leasehold buildings (cost)                                 Gadget equipment (cost)                                 TG Shop fixtures (cost)	72 000 48 000 19 200
Provision for depreciation: leasehold buildings                                            Gadget equipment                                            TG Shop fixtures	10 800 33 600 11 200
Disposal account	4 800 Debit
Bank	16 400 Debit
7% Bank loan (repayable 1 December 2021)	48 000
Inventory at 2 January 2020	19 240
Trade receivables	27 600
Trade payables	20 480
Provision for doubtful debts	880
Capital	80 000
Drawings	7 600

Additional information made available at 1 January 2021

• Inventory was valued at $16 560.

• Rent receivable of $2 400, was owing.

• General expenses of $4 000, were owing.

• Staff salaries include $6 400 paid to Tairira.

• No interest had been paid on the bank loan.

• New shop fixtures costing $6 400 were purchased during the course of the year. Payment was made by cheque. No entries had been made in the books. 

• Depreciation is to be charged on all non-current assets owned at the end of each year.

• The buildings are held on a lease of 20 years. An appropriate amount is charged for depreciation of the leasehold

• Gadget equipment at the rate of 30% per annum using the diminishing (reducing) balance method.

• TG Shop fixtures at the rate of 15% per annum using the straight line method.

• Trade receivables of $2 000, were considered irrecoverable and should be written off. The provision for doubtful debts of 5% should not change. 

Tyree’s Goods

Income Statement for the year ended 1 January 2021

	$	$		$
Revenue				500 000
Less Returns inwards				(12 480)
				487 520
Inventory at 2 January 2020	19 240
Purchases	173 440
Less Returns outwards	(7 640)
		185 040
Inventory at 1 January 2020		(16 560)
Less Cost of Sales				(168 480)
Gross Profit				319 040
Add Other Income
Rent receivables (12 000 + 2 400)				14 400
				304 640
Less Expenses
Administration expenses		56 800
General expenses (11 680 + 4 000)		15 680
Advertising expenses		22 000
Insurance		5 440
Staff salaries (47 760 - 6 400)		41 360
Electricity		8 160
Leasehold buildings		3 600
Gadget equipment		4 320
Shop fixtures		3 840
Disposal		4 800
Loan interest		3 840
Bad Debts		2 000
Increase in Provision for Doubtful Debts		400
				(172 240)
Profit for the year				132 400

Tairira could either have a profit or a loss for the year, depending on how TG has spent its money during the course of the year. If the sum of the gross profit and other income was less than the sum of expenses ($172 240), then Tairira was going to have a loss for the year. For example if the only change we make is the value for the revenue, from $500 000 to $328 000, then the following will be the new Income Statement:

Tyree’s Goods

Income Statement for the year ended 1 January 2021

	$	$		$
Revenue				328 000
Less Returns inwards				(12 480)
				315 520
Inventory at 2 January 2020	19 240
Purchases	173 440
Less Returns outwards	(7 640)
		185 040
Inventory at 1 January 2020		(16 560)
Less Cost of Sales				(168 480)
Gross Profit				147 040
Add Other Income
Rent receivables (12 000 + 2 400)				14 400
				161 440
Less Expenses
Administration expenses		56 800
General expenses (11 680 + 4 000)		15 680
Advertising expenses		22 000
Insurance		5 440
Staff salaries (47 760 - 6 400)		41 360
Electricity		8 160
Leasehold buildings		3 600
Gadget equipment		4 320
Shop fixtures		3 840
Disposal		4 800
Loan interest		3 840
Bad Debts		2 000
Increase in Provision for Doubtful Debts		400
				(172 240)
Loss for the year				(10 800)

In the Income Statement, a loss is not given a negative sign, rather it is put in parentheses.

Statement of Financial Position

An Example of a Statement of Financial Position

This Company is fictitious. The financial year of Mbinga Limited ends on 2 December.

The following information was made available on 2 December 2021. Some of the information

came from Mbinga Limited’s statement of changes in equity for the year ended 2 December 2021.

	$
Premises at cost	544 500
Equipment at cost	277 500
Fixtures and Fittings at cost	105 000
Provision for depreciation: Machinery and Equipment                                            Fixtures and Fittings	124 880 36 110
Inventory	46 280
Trade payables	47 400
Trade Receivables	42 000
Bank	17 100 credit
Rates paid in advance	2 010
Debenture interest accrued	1 200
Wages accrued	480
Provision for doubtful debts	1 120
5% debentures (repayable 2031)	30 000
Ordinary Share Capital	600 000
General reserve	46 500
Retained earnings	112 500

Mbinga Limited

Statement of Financial Position as at 2 December 2021

	Cost	Accumulated Depreciation		Book Value
	$	$		$
ASSETS
Non-current Assets
Equipment	277 500	124 880		152 620
Premises at cost	544 500			544 500
Fixtures and Fittings	105 000	36 110		68 890
	927 000	160 985		766 010
Add Current Assets
Inventory				46 280
Trade Receivables		42 000
Less Provision for doubtful debts		1 120		40 880
Other Receivables				2 010
				89 170
Total Assets				855 180
EQUITY AND LIABILITIES
Current Liabilities
Bank overdraft				17 100
Debenture interest accrued				1 200
Wages accrued				480
Trade Payables				47 400
				66180
Non-current Liabilities
Debentures (repayable in 2031)				30 000
Equity & Reserves
General reserve				46 500
Ordinary Share Capital				600 000
Retained earnings				112 500
				759 000
Total Liabilities				855 180

We use the equation: Assets = Equity (capital) + Liabilities; in order to check if our figures are balanced.

In this case, Total Assets ($855 180) = Total Liabilities ($855 180); so the Statement of Financial

Position is correct.