Income Statement
and Statement of
Financial Position
Introduction to Accounting A
Jacqueline Howell-Williams 2025
Objectives
By the end of this lesson, you will be able:
1. Prepare a Trial Balance from a list of balances
2. To prepare a Vertical Income Statement (Trading and Profit and Loss A/c)
and a Statement of Financial Position (Balance Sheet)
3. Prepare accounts for Accruals and Prepayment
Income Statement (Trading
and Profit and Loss)
&
Statement of Financial
Position (Balance Sheet)
Problem 1
Use the following information to prepare the Trial Balance, Trading and Profit and Loss Account and Balance Sheet
for R. Mendez, 20 April 2021
$
$
Sales
18,600
Purchases
11,874
Opening Stock
2,368
Stock 30/09/19
2,946
Carriage Inwards
310
Carriage Outwards
200
Returns Inwards
205
Returns Outwards
322
Wages
3,862
Motor expense
664
Rent and Rates
304
Lighting and heating expenses
166
Office Expenses
216
Motor Vehicle
Fixtures & Fittings
350
General Expenses
Insurance
78
Equipment
5,000
Debtors
3,896
Cash in hand
82
Creditors
1,731
Cash at bank
400
Drawings
1,200
Capital
1,800
314
12,636
Trading and Profit and Loss Account Template
Sales
Less Returns Inwards
Net Sales
Less Cost of Goods Sold:
Opening Stock
Add Purchases
Cos of Goods Available for Sale
Less Returns Outwards
Add Carriage Inwards
Net Purchases
Less Closing Stock
Gross Profit
Less Expenses
Rent Paid
Telephone
Light/Electicity
Wages
Water/Rates
Gas
Traveling
Net profit/loss
xxx
xxx
xxx
xxx
xxx
xxx
(xxx)
xxx
xxx
xxx
(xxx)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
(xxx)
xxx
Add Revenues ( eg. Discount Received, Interest Received) to Gross
Profit
Trading and Profit and Loss Account Worked out
R. Mendez
Trading and Profi t and Loss Statement for the year ended 30th September 2019
Sales
18,600
Less Returns Inwards
205
Net Sales
18,395
Less Cost of Goods Sold:
Opening Stock
Add Purchases
Less Returns Outwards
Add Carriage Inwards
Cos of Goods Available for Sale
Less Closing Stock
Gross Profit
Less Expenses
Rent and Rates
Offi ce Expenses
Wages
Insurance
General Expenses
Motor Expense
Carriage Outwards
Lighting and heating expenses
Net profit
2368
11,874
322
11,552
310
11,862
14,230
2946
304
216
3862
78
314
664
200
166
11,284
7,111
5804
1,307
Statement of
Financial Position
(Balance Sheet)
What is a Balance
Sheet?
• A Balance Sheet is a
financial statement
setting out the book
values of assets,
liabilities and capitals at
a particular point in
time.
• It shows what the
business owns and what
it owes at a specific
date.
Components of the Balance Sheet
ASSETS
• Net Assets or Working Capital
• Fixed Assets – are listed in the Current liabilities are deducted from
balance sheet in the Order Of
current assets.
Permanency – the one that will last
the longest will be recorded first. Eg:
LESS Long- Term Liabilities: land, building, fixtures and fitting, bank loan, mortgage
machinery, motor vehicle
• Current Assets – These are listed
FINANCED BY
starting with the asset that is least
• Capital
likely to be turned into cash first and
finish with cash itself. In the Order Of
• Add Net profit
Liquidity in ascending order. Eg.
Stock, debtors, bank cash
• Less Drawings
Balance Sheet Template
Vertical Format
Balance Sheet as at day Month Year
$
$
Fixed Asset
Computer Equipment
Fixtures and fi tti ngs
Motor Vehicles
Total Fixed Asset
Current Assets
Stock
Debtor
Bank
Cash
Less Liabilities
Creditors
xxx
xxx
xxx
xxx
xxx
xxx
xxx
$
xxx
xxx
xxx
xxx
xxx
xxx
Working Capital
xxx
xxx
Financed by:
Capital
Add Net Profi t
Less Drawings
xxx
xxx
xxx
(xxx)
xxx
Now we know the Net
profit let us prepare the
Statement of Financial
Position
R. Mendez
Balance Sheet as at 30th September 2019
$
$
Fixed Asset
Equipment
Fixtures and fi tti ngs
Motor Vehicles
Total Fixed Asset
Current Assets
Stock
Debtor
Bank
Cash
Less Liabilities
Creditors
5,000.00
350.00
1,800.00
2,946.00
3,896.00
400.00
82.00
$
5,000.00
350.00
1,800.00
7,150.00
7,324.00
1,731.00
Working Capital
5,593.00
12,743.00
Financed by:
Capital
Add Net Profi t
Less Drawings
12,636.00
1,307.00
13,943.00
1,200.00
12,743.00
Dr ($)
Cr ($)
Loan from P. Parkin
5,000
Captital
Drawings
8,420
Cash at Bank
3,115
Cash in hand
Debtors
Creditors
295
12300
Stock 30 September 2007
23910
Motor Van
4,100
Office Equipment
6,250
Sales
Purchases
Returns Inwards
Carriage Inwards
Returns Outwards
Carriage Outwards
Motor Expenses
Rent
Telephone and internet charges
Wages
Insurance
Office Expenses
Sundry Expenses
Total
Stock at 30 September 2008 was
J$27,475.00
25,955
9,370
130,900
92,100
550
215
309
1,630
2,970
405
12,810
492
1,377
284
171532
27,475
307
In Class
Exercise
Bins drew up the following trial balance as at September 2008. You
are to draft trading and profit and loss accounts for the year to 30
September 2008 and a balance sheet as at that date.
171532
Trading and Profit and Loss Account Worked out
Bins drew up the following trial balance as at September 2008.
You are to draft trading and profit and loss accounts for the year
to 30th September 2008 and a balance sheet as at that date.
BINS
Trading and Profit and Loss Statement for the year ended 30th September 2008
Sales
130,900.00
Less Returns Inwards
550.00
Net Sales
Less Cost of Goods Sold:
Opening Stock
Add Purchases
Less Returns Outwards
Add Carriage Inwards
Cost of Goods Available for Sale
Less Closing Stock
Gross Profit
Less Expenses
Carriage Outwards
Offi ce Expenses
Sundry Expense
Insurance
Wages
Telephone and internet charges
Motor Expenses
Rent
92,100.00
307.00
91,793.00
215.00
Dr ($)
130,350.00
23,910.00
92,008.00
115,918.00
27,475.00
88,443.00
41,907.00
309.00
1,377.00
284.00
492.00
12,810.00
405.00
1,630.00
2,970.00
20,277.00
Net profit
Cr ($)
Loan from P. Parkin
5,000
Captital
Drawings
25,955
8,420
Cash at Bank
3,115
Cash in hand
295
Debtors
Creditors
12300
Stock 30 September 2007
23910
Motor Van
4,100
Office Equipment
6,250
Sales
Purchases
Returns Inwards
Carriage Inwards
Returns Outwards
Carriage Outwards
Motor Expenses
Rent
Telephone and internet charges
Wages
Insurance
Office Expenses
Sundry Expenses
Total
9,370
130,900
92,100
550
215
309
1,630
2,970
405
12,810
492
1,377
284
171532
21,630.00
Stock at 30 September 2008 was
J$27,475.00
27,475
307
171532
Recap
The Income Statement
The primary objective of any business is to make a profit. In order to determine the extent to which
the objective of making a profit has been met, the firm prepares a statement called the Income
Statement (Trading and Profit and Loss Account). This is done at the end of an accounting period,
usually after one year. It involves the matching of income with expenses for the respective period.
There are two aspects to the calculation of profits.
1. There is the calculation of profit earned from the sale of goods, or gross profit;
2. The profit earned from the operation of the business.
The Income Statement has two main sections; the Trading Account and the Profit and Loss Account.
Trading and Profit and Loss Account Worked out
R. Mendez
Trading and Profi t and Loss Statement for the year ended 30th September 2019
Sales
18,600
Less Returns Inwards
205
Net Sales
18,395
Less Cost of Goods Sold:
Opening Stock
Add Purchases
Less Returns Outwards
Add Carriage Inwards
Cos of Goods Available for Sale
Less Closing Stock
Gross Profit
Less Expenses
Rent and Rates
Offi ce Expenses
Wages
Insurance
General Expenses
Motor Expense
Carriage Outwards
Lighting and heating expenses
Net profit
2368
11,874
322
11,552
310
11,862
14,230
2946
304
216
3862
78
314
664
200
166
11,284
7,111
5804
1,307
R. Mendez
Balance Sheet as at 30th September 2019
$
$
Fixed Asset
Equipment
Fixtures and fi tti ngs
Motor Vehicles
Total Fixed Asset
Current Assets
Stock
Debtor
Bank
Cash
Less Liabilities
Creditors
5,000.00
350.00
1,800.00
2,946.00
3,896.00
400.00
82.00
$
5,000.00
350.00
1,800.00
7,150.00
7,324.00
1,731.00
Working Capital
5,593.00
12,743.00
Financed by:
Capital
Add Net Profi t
Less Drawings
12,636.00
1,307.00
13,943.00
1,200.00
12,743.00
The Balance Sheet shows the firm’s financial position at the given date. It is comprised of the
assets, liabilities and the owner’s equity, and maintains the equation of:
The Balance Sheet (Statement of Financial Position)
Assets = Liabilities + Capital/Owners Equity.
Marshalling of the Assets
Both the fixed and the current assets may be presented using one of two formats:
Order of Permanence
• Using this format, the assets are listed in the balance sheet starting with the most
permanent, i.e. those which are hardest to be converted to cash, and leading to the most
liquid, i.e. cash in hand. This is the conventional method that should be used.
Order of Liquidity
• In this approach, the assets are listed starting with the most liquid, leading to the most
permanent, or the hardest to be converted to cash.
Order Of Permanence
Fixed Assets
 Land
and Building
 Fixtures and Fittings
 Machinery and Equipment
 Motor Vehicle
Current Assets
 Stock
 Debtors
Accruals and
Prepayment
Accrued & Prepaid Expenses
Accrual Principles:
charge to the accounting year the
amount of money DUE, not paid.
• Accrued Expenses (Expense Owing) rule: add accruals
• Prepaid Expenses (Paid in advance) rule: less prepayments.
Question: how do you add to an expense A/C ?
Place the figure on the Debit Side
How do you less from an expense A/C?
Place the figure on the Credit Side
Accruals
Accrued
Expenses and
Revenues
Accrued/Outstanding Expenses Activity 1
In 2007, D. Stone’s telephone expense details were as follows: bank
payments were made on April 2, $345, July 3, $420, October3, $375. A bill
for $375 was still owing at the end of December.
.
2007
April 2
July 3
Oct. 3
Dec 31
Telephone Expense A/C
$
2007
$
bank
345
Dec 31 Profit & Loss A/c
1,515
bank
420
bank
375
Accrued c/d 375
.
1515
1515
Jan 1 bal b/d
375
.
.
Activity 2
M. Williams insurance expense account for 2007 were as follows: February
9, bank $210, August 10 $420, November 18, $420, amount owing for
December $210
Insurance Expense A/C
.
2007
$
2007
$
Feb. 9
bank
210
Dec 31 Profit & Loss
1,260
August 10 bank
420
Nov. 18
bank
420
Dec 31
Accrued c/d 210
_____
1,260
1260
Jan 1 bal b/d
210
Rent Receivable A/C
P. Thorpe collected from her tenants the following for 2019. April $400
cheque, July$400 cheque, October cash $400, at the end of the year $400
was owing.
Rent Receivable A/C
2019
$
2019
Dec 31 Profit and Los 1,600 April
Bank
July
Bank
Oct
Cash
400
Dec
Accrued c/d
1,600
Jan 1 accrued b/d
400
$
400
.
400
400
1,600
Activity 3
N. Mitchell company’s book revealed the following: commission received
April 30, bank $1,280, Sept. 2 bank $1,400, the amount that was owing at
the end of December was $1,360. Prepare his commission receivable a/c.
Commission Receivable A/C
2019
$ 2019
Dec 31 Profit and Loss 4,040
April 30 Bank
Sept 2
Bank
Dec 31
Accrued c/d
4,040
Jan 1 accrued b/d
1,360
$
1,280
1,400
1,360
4,040
.
Treatment in the Balance Sheet
NB: add owings and show as one figure
.
Balance Sheet
.
Current Assets
$
Stock
X
debtor
X
Accrued Revenue
(400 + 1360)
Bank
X
Cash
X
Current Liabilities
trade creditors
x
Accrued Expense (375 + 210)
Prepayment
Expense and
Revenue
Prepayment/Prepaid/Paid in Advance
These are payments made before
they fall due or the due date
Prepaid Expense
V. Hamilton books revealed the following information: Rent paid by cheque
as follows for 2017: Jan 2 $2000, March 31, $2000, July 7, $2000,Oct. 2,
$2,000 and Dec.20 $2,000, included in these payment is $2,000 for Jan
2018.
Rent Expense A/C
2017
$
2017
Jan 2 bank
2,000
Dec 31 Prepaid c/d
Mar.31 bank
2,000
Profit and Loss
July 7 bank
2,000
Oct 2
bank
2,000
Dec 20 bank
2,000
10,000
Jan 1 prepaid b/d 2,000
$
.
2,000
8,000
10,000
Prepaid Expense
The following was found in K. Crawford books for 2016. Rates paid as follows:
March bank $4,000, July bank $4,000, Oct bank $4,000 and Dec. bank $4,000
$4, 000 was paid in advance.
2016
March bank
July
bank
Oct
bank
Dec
bank
Jan 1 prepaid b/d
Rates A/C
$
2016
4,000 Dec Prepaid c/d
4,000
Profit and Loss
4,000
4,000
16,000
4,000
$
4,000
12,000
16,000
Prepaid Revenues - Example 1
In the books of K. Long, the following was noted. Rent Received from
tenants for the year was: March cash $840, July, cash $840, Oct. Cash
$840 and Dec, cash $840, included in this amount was $840 PREPAID by
cash.
Rent Received A/C
2016
Dec Prepaid c/d
Profit & Loss
$
2016
840
March
cash
2,520
July
cash
Oct
cash
Dec
cash
3,360
Jan 1 prepaid b/d
$
840
840
840
840
3,360
840
Prepaid Revenues - Activity
P. Presh an entrepreneur book revealed the following: 2019, commission
received April 30, bank $4,500, Sept. 2 bank $4,500, Oct. 3. $4,500, Dec.
20,$4,500, he also received the amount for January 2020 $4,500. Prepare
his commission receivable a/c.
Commission Receivable A/C
2019
$
2019
Dec 31 Prepaid c/d
4,500
April 30 Bank
Profit & Loss
13,500
Sept 2
Bank
Oct. 3
Bank
Dec. 20
Bank
18,000
Jan. 1
Prepaid b/d
$
.
4,500
4,500
4,500
4,500
18,000
4,500
Treatment in the Balance Sheet
NB: add prepayments and show as one figure
.
Balance Sheet
Current Assets
$
Stock
X
debtor
X
Accrued Revenue
X
Prepaid Expense
(200+4,000)
Bank
X
Cash
X
Current Liabilities
trade creditors
x
Accrued Expense
x
Prepaid Revenue
(4,500+840)
.
Questions
1. If you are told that an expense account has a debit balance
at the beginning of the year. What does this
represent? Accruals or Prepayment
Prepayment
2. If a revenue account has a debit balance at the beginning of the year
what does this means?
Accruals
Draw up the trading and profit and loss account for J. Lester for the year ended 31 December 2010
and show the balance sheet extract.
$ $
Sales
152,000
Rent and rates
3,790
Purchases
81,500
Bad debts
Discount received
3,100
Discount allowed
1,650
Wages
21,470
Bank Charges
Return Inwards
2,460
General Expenses
Return Outwards
1,910
Commission received
Equipment
60,000
Stock 1, Jan, 2010
570
Carriage outwards
510
Carriage inwards
360
230
2,490
820
21,600
a. Stock $27,540
b. Rent in arrears $320
c. Carriage outwards owing $70
d. Commission received owing $120
e. General expense prepaid $490
f.
Discount received prepaid $100
J. Lester
Trading and Profi t and Loss Statement for the year ended 31st December 2010
Sales
152,000.00
Less Returns Inwards
2,460.00
Net Sales
Less Cost of Goods Sold:
Opening Stock
Add Purchases
Less Returns Outwards
Add Carriage Inwards
21,600.00
81,500.00
1,910.00
79,590.00
360.00
79,950.00
101,550.00
27,540.00
Cost of Goods Available for Sale
Less Closing Stock
Gross Profit
Add Revenue
Commission Received
Add Accural
Discount Received
Less prepayment
820.00
120.00
3,100.00
100.00
3,000.00
3,940.00
79,470.00
Less Expenses
Carriage Outwards
Add : owings
570.00
70.00
Discount Allowed
General Expenses
Less Prepayment
2,490.00
490.00
2,000.00
Rent and Rates
Add : owings
3,790.00
320.00
4,110.00
Net profit
74,010.00
75,530.00
940.00
Total Revenue
Bad Debt
Bank Charges
Wages
Total Expenses
149,540.00
640.00
1,650.00
570.00
230.00
21,470.00
30,670.00
48,800.00
Balance Sheet Extract
Current Assets
Stock
$
27,540
debtors
prepaid expense
490 (general expense)
accrued Revenue
120 (commission Received)
Current Liabilities
Creditors
Accrued expenses
Prepaid Revenue
390 (carriage out. & rent and rates)
100 (discount received)