MEM 5209: FINANCIAL

MANGEMENT IN EDUCATION
LESSON SEVEN AND EIGHT
LECTURER: DR. RUTH THINGURI
EMAIL: NTHINGURI@YAHOO.COM OR
SEMESTER: APRIL, AUGUST, DECEMBER.2016

MODULE LEADER:
VENUE:
LESSON 7&8:1:DEFINITIONS

 INCOME STATEMENT: An income statement shows the

results of operating for a period of time. It is sometimes called
operating statement or statement of operations. It shows how
well an organization performed during the period covered.
 Thus an income statement is a statement in which revenues
for a period of time are matched with expenses for the same
period of time. If revenues exceed the expenses, the result is
net income, and if expenses exceed the revenues, the result is
net loss.
 The format of income statement varies with the needs of
users, preferences of accountants and other circumstances.
 Income statement is prepared by profit making organizations.
LESSON 7&8:1:DEFINITIONS

REVENUE: Revenue is the inflow of assets in return

for services performed or products delivered during a
period; Revenue generally considered earned when
services are performed or goods are sold, regardless
of when money is actually received. In other words,
revenues are identified with the period in which they
are earned. For example, a retail trader earns revenue
when a sale is made on credit. A right to receive
money is recognized as account receivable. An
account receivable (debtor a/c) is an asset that will
eventually be converted to cash.
LESSON 7&8:1:DEFINITIONS

EXPENSE: an expense is a sacrifice, or cost incurred to

generate (produce) revenue; Expenses are also recognized
in the period that is benefited, regardless of when payment
is made in cash. For example, salaries earned by employees
are considered an expense of the period in which employees
work, even though they may not be paid in cash until the
following period. Thus the amount by which the revenues
for a particular period of time exceed the expenses incurred
to generate them is called net income or net profit.
 NETPROFIT: net profit is simply the amount by which
the revenues for a particular period of time exceed the
expenses incurred to generate them.
LESSON 7&8:1: FINAL ACCOUNTS

Final accounts for profit making

organizations consist of two categories:
Income statement
Balance sheet
Final Accounts for non-profit making
organization consist of two stages:
Income and Expenditure Account
Balance Sheet
LESSON 7&8:2: DIFFERENT ITEMS
OF INCOME STATEMENT
Sales: It is the gross amount of goods sold or services
rendered during an accounting period.
Net Sales: When sales discount, sales returns and
allowances to customers are deducted or subtracted from
gross sales the result is net sales.
Cost of Goods Sold: It represents the sum of the costs of
all goods which have been sold during the accounting
period. It is ascertained by adding the value of unsold
goods at the beginning of the year (opening inventory or
stock) to the purchases made during the year and the
deducting the values of unsold goods at the end of the year
(closing inventory of stock) from the purchases.
LESSON 7&8:2: DIFFERENT ITEMS
OF INCOME STATEMENT
 Gross Profit: Goods are normally sold at a price that is more than the cost
price. Gross profit or gross margin is what remains after cost of goods sold is
deducted from net sales. This is the margin that is available to cover the other
expenses for a period and to yield net income, if there is any.
 Gross Profit = Net sales - Cost of goods sold
 Operating Expenses: Merchandising or trading concerns incur operating
expenses in addition to cost of goods sold. So, the expenses which are incurred for
the generation of revenues from the sales of goods are called operating expenses.
Operating expenses may be divided into two:
 Selling Expenses: All expenses regarding sale of goods and sending them to the
buyer belong to this class e.g. Carriage outwards, advertisements, salesmen's
salaries, sales commission, traveling expenses, bad debts, packaging expenses etc.
 Administrative Expenses: All expenses connected with the office and its
conduct are called administrative expenses. Examples of administrative expenses
include office salaries, office rent, electric charges, postage and telegrams,
telephones, printing and stationary etc.
LESSON 7&8:2: DIFFERENT ITEMS
OF INCOME STATEMENT
Net Operating Income:
Operating expenses are deducted from gross profit to
arrive at net operating income. Net operating income
is what is left after both cost of goods sold and
operating expenses for a period have been deducted
from net sales. For a merchandising concern, it is
what has been earned from the normal operations of
buying and selling merchandises.
Net operating income = Gross profit - operating
expenses
LESSON 7&8:3:FORMAT OF AN INCOME
STATEMENT
MR KIBOKO
TRADING ACCOUNT
Dr. FOR THE PERIOD ENDING 31ST DECEMBER 2007&8
Cr
Shs Shs
OPENING STOCK XX SALES XX
ADD PURCHASE XXX LESS RETURN INWARDS XX
LESS RETURN OUTWARDS XXX---XX NET SALES XX
GOODS AVAILABLE FOR SALE XX
LESS CLOSING STOCK XX
COST OF GOODS SOLD XX
GROSS PROFIT XX OR GROSS LOSS
TOTAL XX
GROSS LOSS OR TOTAL XX
GROSS PROFIT XX
LESSON 7&8:3:FORMAT OF AN INCOME STATEMENT

MR KIBOKO
PROFIT AND LOSS ACCOUNT
Dr. FOR THE PERIOD ENDING 31ST DECEMBER 2007&8
Cr.
EXPENSES GROSS PROFIT XX
RENT XX DISCOUNT RECEIVED XX
DISCOUNT ALLOWED XX RENT INCOME XX
SALARY AND WAGES XX
INSURANCE XX
NET PROFIT XX OR NET LOSS
TOTAL XX TOTAL XX
LESSON 7&8:7&8: GROUP ACTIVITY

Complete the following exercise

1.The following information was extracted from the
books of Mr. Maina for the year ended 31st
December, 2003. Opening stock Shs 500; purchases,
Shs 2,000; transport, Shs 100; salaries, Shs 1,500;
insurance, Shs 300; sales Shs 5,000 and closing
stock was valued at shs 200.
Prepare
A. A trading account
B. A profit and loss account
LESSON 7&8:7&8: GROUP ACTIVITY

2.The following information was obtained from the

books of Tharaka Secondary canteen during a
trading period ending 31st December 2011.Opening
stock shs 2,000, Purchases shs 27,000, Return
inwards shs 1500, Sales shs 30,000, Return
outwards shs 2,000, Closing stock shs 5,000,
Discount received shs 1,500, discount allowed shs1,
000, Water bill shs 500, Electricity bill shs 1,000,
Transport expense shs 1,500. Prepare the trading,
profit and loss account for the period ending 31st
December, 2011
LESSON 7&8:5: FINAL ACCOUNTS FOR NON-PROFIT
MAKING ORGANIZATION

 Income and Expenditure Account:

 All transactions relating to non-profit-seeking concerns like Club, Library
etc. are recorded in the books of account strictly according to Double Entry
System. At the year-end result is determined through Final Accounts. Final
Accounts consist of two categories:
 Income and Expenditure Account
 Balance Sheet
 The account through which surplus or deficit of a non-profit-seeking concern
is ascertained, is called Income and Expenditure Account.
 All the information necessary for preparation of this account will be available
from ledger accounts. Its left-hand (i.e. Debit) side records all expenditure,
while the right-hand (i.e. Credit) side records all revenues relating to the
current year. The balance of the account, if credit, indicates surplus, i.e.
excess of income over expenditure. Conversely, the balance of the account, if
debit, indicates deficit, i.e. excess of expenditure over income.
LESSON 7&8:6: PROCEDURE OF
PREPARING INCOME AND EXPENDITURE
ACCOUNT

 It is like a Profit and Loss Account of a profit-seeking concern.

 All expenses are recorded on Debit side and all revenues on Credit side.
 Only revenue transactions are included in it. No capital items is taken
into account.
 All the items of income/revenue concerning current year — whether
received in cash or not—and all items of expense —whether paid in cash
or not—are taken into account. But no item of income or expense
concerning last year or next year is included in it.
 Surplus or deficit of a concern is ascertained through this account.
Credit balance "indicates surplus, while debit balance indicates deficit.
 Its balance is transferred to Capital Fund Account.
 It is prepared on the last day of an accounting year.
 It does not start with any opening balance.
LESSON 7&8:7:FORMAT OF AN INCOME AND
EXPENDITURE ACCOUNT

THIKA CLUB
INCOME AND EXPENDITURE ACCOUNT
FOR THE YEAR ENDED 31.12.2005
Dr. Cr.
EXPENSES INCOMES
OFFICE EXPANSE SUPSCRIPTIONS
SALARIES AND WAGES DONATION
ELETRIC CHARGES
TELEPHONE CHARGES

SURPLUS I.E. EXCESS OF INCOME OR DEFICIT-EXCESS OF

OVER EXPENDITURES XX EXPENDITURE OVER INCOMES
TOTAL XX
TOTAL XX
LESSON 7&8:8: GROUP ACTIVITY

The following information was extracted from the

books of Kago Primary school for the year ended 31st
December, 2013. Subscriptions Ksh 100,000,
donation Ksh 50,000 office expanse Ksh 7&8,000,
salaries and wages Ksh 36,000, electricity charges
Ksh 2,7&800, telephone charges 3,600. Prepare an
income and expenditure account for the year ended
31st December, 2013
LESSON 7&8:9: SELFTEST/REFLCETIVE
QUESTIONS
Distinguish between trading profit and loss account and
income and expenditure.
Complete the following exercise
The following information was extracted from the books
of Mr. Maina for the year ended 31st December, 2003.
Opening stock Shs 500; purchases, Shs 2,000; transport,
Shs 100; salaries, Shs 1,500; insurance, Shs 300; sales
Shs 5,000 and closing stock was valued at shs 200.
Prepare
A. trading account
B. profit and loss account
LESSON 7&8:9: SELFTEST/REFLCETIVE QUESTIONS

2.The following information was obtained from the

books of Tharaka Secondary canteen during a
trading period ending 31st December 2011.Opening
stock shs 2,000, Purchases shs 27,000, Return
inwards shs 1500, Sales shs 30,000, Return
outwards shs 2,000, Closing stock shs 5,000,
Discount received shs 1,500, discount allowed shs1,
000, Water bill shs 500, Electricity bill shs 1,000,
Transport expense shs 1,500. Prepare the trading,
profit and loss account for the period ending 31st
December, 2011
LESSON 7&8:9: SELFTEST/REFLCETIVE QUESTIONS

3.The following information was extracted from the

books of Kago Primary school for the year ended 31st
December, 2013. Subscriptions Ksh 100,000,
donation Ksh 50,000 office expanse Ksh 7&8,000,
salaries and wages Ksh 36,000, electricity charges
Ksh 2,7&800, telephone charges 3,600. Prepare an
income and expenditure account for the year ended
31st December, 2013