There are four main financial statements that are prepared by companies, that is, the income statement, Balance sheet, cash flow statement and the shareholders equity statement. The statements are prepared to aid users of financial statements in decision making. The users of financial statements include creditors, shareholders, employees, the government just to name a few. The statements are prepared using the generally accepted accounting principles.
Accountants make the following assumptions when preparing financial statements.
Transactions are recorded at their historical cost as opposed to the market value.
The statements are prepared using the matching and the accrual principles.
The prudence concept is used when preparing financial statements
The financial statements have to have full disclosure and notes accompanying them.
Balance Sheet
The balance sheet contains information as regards the assets, Liabilities and equity that exists within an organization at a given point in time. The assets are resources owned and controlled by a company from which future benefits are expected, liabilities are obligations of a company from which an outflow of resources is expected in the future and equity refers to the funds provided by the owners of the company.
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The accounting equation is represented by:
Total Assets (current assets + Non-current assets) = Total Liabilities (current liabilities + non-current liabilities) + Total Equity
The assets are recorded in the balance sheet starting with the most liquid, the liabilities are recorded starting with those that are due with the short-term liabilities coming first and then the long-term liabilities. The equity account starts with the paid in capital then followed by the earnings.
Balance Sheet Example
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Balance Sheet |
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As at 31st December 2018 |
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| Assets | ||
| Prepaid Rates |
1000 |
|
| Closing Stock |
22500 |
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| Cash |
6000 |
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| Bank |
30000 |
|
| Accounts Receivables ( less provision for doubtful debts of 1000 and adjustment for 300) |
53700 |
|
| Total Current Assets |
113200 |
|
| Non-Current Assets | ||
| plant and machinery |
250000 |
|
| Accumulated Depreciation |
45000 |
205000 |
| Motor Vehicle |
79200 |
|
|
32000 |
47200 |
|
| Total assets |
365400 |
|
| Financed by | ||
| Current Liabilities | ||
| Accrued Rent |
3000 |
|
| Accounts payables |
46600 |
|
| Total Liabilities |
49600 |
|
| Shareholders’ equity | ||
| Capital |
250000 |
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| Net Income |
65800 |
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| Total Liabilities & shareholders’ equity |
365400 |
|
Income Statement Example
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Income statement |
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For year ended 31st December 2018 |
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| Sales |
600000 |
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| Less Return inwards |
40000 |
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| Net sales |
560000 |
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| Cost of goods sold | |||
| opening inventory/stock |
25000 |
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| add purchases |
360000 |
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| Less return outwards |
20000 |
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| Add carriage inwards |
2500 |
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| less closing inventory |
22500 |
345000 |
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| Gross profit |
215000 |
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| Add other incomes | |||
| Discount received |
4000 |
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| Less expenses | |||
| wages and salary |
60000 |
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| postage and telephone |
7500 |
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| water and electricity ( add outstanding electricity) |
9200 |
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| general expenses |
8500 |
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| bad debts |
1500 |
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| rent and rates ( add accruals and less prepaid rates) |
17000 |
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| Depreciation plant & machinery 10% |
25000 |
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| depreciation motor vehicle 20% |
16000 |
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| discount allowed |
5000 |
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| carriage outwards |
3500 |
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| Total expense |
153200 |
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| Net income |
65800 |
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Depreciation
There are number of depreciation methods applied by different companies. The most common depreciation methods are the depreciation method and the reducing balance method. The straight-line depreciation method allocates a uniform depreciation across the useful life of the asset.
Example
Straight Line
Company A bought a motor vehicle at 30000in the year 2020. The company uses the straight-line deprecation method at a rate of 20. The vehicle will have a salvage value of 5000 at the end.
Depreciation = (30000 – 5000) x 20% = 5000
Reducing balance method
Company A bought motor vehicle in the year 2020 at a cost of 30000. The company uses the reducing balance depreciation method at a rate of 20. Calculate depreciation for 2021
Depreciation 2020 = (30000 – 0) x 20% = 6000
2021 accumulated depreciation for 2020 = 6000
Deprecation 2021 = (30000 – 6000) x 20% = 4800
