PREPARATION OF FINANCIAL
STATEMENTS
INTRODUCTION
• A statement of comprehensive income is the sales (revenue) for the
business less all the expenses incurred to generate the sales. The end
product is ether profit or loss.
• The main objective of every business organization is to make profit.
However, in some instances, businesses end up making losses.
• It is important to measure the performance of a business organization
in certain predefined periods to asses whether the business
organization is making profits or losses.
DEFINITION OF KEY TERMS
• Statement of comprehensive income- formerly known as the income
statement basically represents the performance of a business. It is the
sales (revenue) for the business less all the expenses incurred to
generate the sales. The end product is ether profit or loss.
• Statement of financial position- formerly known as the balance sheet
is a statement which shows the assets of a business at a given point in
time and the claim thereof against the assets, the claims can either by
the capital injected or liabilities to third parties
TRADING ACCOUNT
• This is simply the calculation of gross profit.
• The trading account summarises the trading activities (sale and
purchase of goods/stocks) of the business and tries to determine the
gross profit for the relevant financial period.
• The gross profit is then taken up in the profit and loss account as part
of the income.
• See format and example in a different document
STATEMENT OF COMPREHENSIVE INCOME
• A statement of comprehensive income basically represents the
performance of a business.
• It is the sales (revenue) for the business less all the expenses incurred
to generate the sales.
• The end product is ether profit or loss.
Reasons for preparing the statement of
comprehensive income
i) To compare the actual profit to the expected profits
ii) For planning purposes i.e. to identify areas that need attention in
future
iii) To obtain funds from lenders based on one’s profitability
iv) To inform prospective owners on the performance
v) In computation of taxes to ensure that the correct amount is
remitted to the tax authorities.
• Format and example provided in a separate document
Notes
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Carriage inwards forms part of the cost of sales. It represents the amount paid
for the transportation of goods into the business premises before they are
sold.
Carriage outwards is a business expense. It represents the amount paid to
transport goods to the customer’s premises.
All costs incurred to put the goods into saleable condition form part of the cost
of sales e.g. cost of transportation to the warehouse, insurance while goods
are on transit to the warehouse, warehouse expenses.
Incase the net sales are less than cost of sales the difference is referred to as
gross loss.
If the expenses are more than the gross profit the difference is referred to as
net loss
Other incomes represent that portion of revenues not directly related to the
main business e.g. commissions, rent receivable e.tc