Chapter 8

Financial Statements – Part A

Trial Balance: It is a list of
balances on the accounts in
the ledger at a certain date.
We use this to prepare a set
of financial statements. .

Example of a trial balance:

Types of
accounts which
have a debit
balance & those
which have a
credit balance
Expense: a cost that businesses incur in running their
operations. Expenses include wages,
salaries, maintenance, rent, and depreciation.

Revenue: the total amount of income generated by the

sale of goods or services related to the
company's primary operations.
  In a business profit is calculated in the
financial statements which are usually
prepared at the end of the financial
Financial year.

Statements  Two types of financial statements:

 1. Income statement
 2. Statement of financial position
 Every item in a trial balance appears
once in a set of financial statements.
 Any notes to a trial balance are used twice
in a set of financial statements

Tick off the items from a trial

balance and the notes to a
trial balance as you use them
so that nothing is omitted
 Income statement
 It has two sections
1. Trading section in which
the gross profit of the
business is calculated.
2. A profit & loss section in
which the profit for the year
of the business is calculated.

Thi
Importance of preparing
income statements
 Planning ahead
 Obtaining loans from banks, from other businesses, or
from private individuals
 Telling prospective business partners how successful
the business is
 Telling someone who may be interested in buying the
business how successful the business is
 Calculating the tax due on the profits so that the
correct amount of tax can be paid to the tax
authorities.
Trading section of the
income statement

 Gross profit: It is the

difference between the
selling price & the cost
of goods sold.
The term "revenue" is
used instead of 'sales'
in a trial balance and in
an income statement
Profit & loss section of the income
statement
 Theprofit for the year is the final profit after any other
income has been added to the gross profit and the
running expenses have been deducted.
 The formula for calculating profit for the year is:
Profit for the year = Gross profit + Other income – Expenses

Gross profit = Selling price of goods – Cost of sales

After combining
both the section