3.4 Financial statements

Financial statements

1.      Income Statement

2.      Balance Sheet

1.    Income Statement

A financial statement measuring financial position of a company over one accounting year.

Formula

Revenue – Expenditure = Profit

·        Trading A/C

v  First section of the income statement

v  It is used to calculate gross profit

·        Profit and Loss A/C

v  Second section of income statement

v  It is used to calculate net profit

·        Profit and Loss Appropriation A/C

v  Third section of income statement

v  It shows profit allocation in limited companies

Format of Income Statement

Format of Profit and Loss Appropriation A/C

2.    Balance Sheet

A financial statement that summarizes a company’s assets, liabilities and shareholders’ equity over one accounting year.

Formula of accounting equation

Assets = Liabilities + Equity

·        Assets

Resources owned by the business.

v  Fixed asset

v  Current asset

·         Liabilities

Debts of the business.

v  Current liability

v  Long-term loan

·       Equity

Money put into the business as capital by the owner.

Format of Balance Sheet

Purpose of accounts to the stakeholders:

1.     Shareholders

External stakeholders who are interested to know company’s profit for the dividends they would going to retain.

2.     Managers

Internal stakeholders who are interested to see whether the company is operating efficiently or not within one year.

3.     Employees

Internal stakeholders who are interested to know whether the company is doing well to pay them more and their jobs are secure.

4.     Investors

External stakeholders who find potentiality in buying shares of the company.

5.     Creditors

External stakeholders who are interested to know the financial position of the company so they feel secure enough to get back their debts.

6.     Customers

External stakeholders who are interested to see whether the company will survive in future so that they can get the availability of after sales service, etc.

7.     Government

External stakeholders who are interested to scrutinize the factual records relating profit earned by the company so that tax can be calculated.

N.B.“every stakeholders have interest on financial statements of businesses”