2nd Edition by Edwin Olima FCCA
and any business will have at any given time a set of assets and a
set of liabilities. The listing of the values of these assets and
a given date comprise The
. The balance sheet thus shows the
net worth of the business.
Using the final trial balance
, enter the relevant balances in the balance sheet below. A
few have been done for you. Totals have been left in to help you
check your entries as you go along.
your answer with the one in the answer section at the back of the
book. Note that the value of net assets should equal the value of
total equity (amount owned by and owed to the shareholders/owners of
the business). When you have referenced your working papers (See APPENDIX
), you can enter your references in the reference column
above to show where the figures come from.
strict statutory requirements for limited companies the profit and
and the balance sheet have to follow a set format. Your accountant
will be able to help you produce these financial accounts according
to the relevant laws of the country and industry within which your
FOR PRODUCING FINANCIAL ACCOUNTS
Profit and Loss account
profit and loss
shows how much profit has been made by the business over a given
period of time and details the income and expenses
rise to that profit. It can be used for the following purposes:
It can help identify
areas where costs are too high and need to be controlled and also
where income is increasing and requires more investment.
The net income shown
by the profit and loss
can be used to justify further funds to expand the business in the
form of issues of share capital
loans from a bank.
It can be used to
compare performance with other companies in the same industry.
need the profit and loss
to verify that the business is paying its due share of taxation on
now require corporations to file annual accounts in the interest of
If one decides to
sell on the business to another entrepreneur then by looking at the
net income flows over the past years one can get an indication of
future income flows and thus get a fair price for the sale of the
balance sheet shows the wealth of a business on a given date and it
is useful for the following purposes:
The net assets on
the balance sheet can be used to support a bid for further funds to
expand the business either by the issues of share capital
via loans from a bank.
A number of ratios
can be extracted from the balance sheet and the profit and loss
which can then be compared over time and with other similar
businesses to determine if financial performance and health is good
(See APPENDIX D
now require corporations to file annual accounts that include a
balance sheet in the interest of the public.
If one decides to
sell the business to another entrepreneur then by looking at the net
asset value of the business (together with other information) on the
sale date and over previous dates one can get a fair price for the
sale of the business.
DEFINITIONS OF TERMS USED IN FINANCIAL
doing the exercises in this book and from your general experience
you will have gained a feel for the meaning of the terms used in
profits and wealth are serious financial issues, The Accounting
Standards Board (ASB)
are rights or other access to future economic benefits controlled by
an entity as a result of past transactions or events.
Examples from The Company Ltd: The
van, the bank account balance, trade debtors.
are obligations of an entity to transfer economic benefits as a
result of past transactions or events.
Examples from The Company Ltd: Trade
Creditors, Corporation Tax.
interest is the residual amount found by deducting all of the
entity’s liabilities from all the of the entity’s assets.
Examples from The Company Ltd: Total
Equity, that is, share capital and retained profits.
increases in ownership interest not resulting from contributions
Examples from The Company Ltd: Income
like sales and bank interest received.
decreases in ownership interest not resulting from distributions to
Examples from The Company Ltd:
Expenses like cost of goods sold, salaries, rent etc.
from owners are increases in ownership interest resulting from
transfers from owners in their capacity as owners.
Example from The Company Ltd: Share
capital of £100.00 banked in the company.
to owners are decreases in ownership interest resulting from
transfers to owners in their capacity as owners.
Example from The Company Ltd: drawings
(or dividends) of £900.00.
examples taken from The Company Ltd are some of the most common
types of elements of financial statements.
terms and definitions used by the ASB are probably not what your
normal usage would be, however given the sometimes complex nature of
businesses and transactions, the terms and definitions above ensure
that even these complex business situations/transactions are