Prepare end-of-period financial reports
Contents
Key to resources
Introduction
Income statement
Balance sheet
Feedback to activities
This learning guide is based on the following resource(s):Textbook
Duncan A (2006) Introductory Accounting, National Core Accounting Publications, Bondi
Note
A new edition of this textbook was being published at the same time as this resource.
Where possible, we have provided a second Key to resource to this new edition.
Key to resources
Resource / Textbook (2006 edition)1 / Chapter 16 ‘Closing entries’, section 16.7, p498
2 / Chapter 16, section 16.7, p499
Resource / Textbook (2007 edition)
1 / Chapter 14 ‘Closing entries’, pp 448– 450 (periodic inventory)
2 / Chapter 14, section 16.7, pp 451 – 453 (perpetual inventory)
Introduction
The two key financial reports for management are the income statement and the balance sheet. There is another financial report—the statement of cash flows. However, that statement will be the subject of future studies.
Income statement
The income statement is prepared from the details in the general ledger for the trading account and profit and loss account. The income statement restates the information in the trading and profit and loss accounts and puts that information in a format more useful to management. It shows the results of the business operations for a given period. Recall that the following steps occurred for the preparation of the trading account and profit and loss account:
1Balance day adjustments recorded in the general journal
2Balance day adjustments posted into the general ledger
3Closing general journal entries recorded in the general journal
4Closing general journal entries posted to the general ledger including the trading and profit and loss accounts.
5Net profit/loss transferred to the capital account from the profit and loss account.
/ Now go to Resource 1Look at the income statement for WKenny. This income statement is prepared for a business using periodic inventory. If WKenny was using perpetual inventory, the income statement would appear as the one presented below.
Income statement of WKenny
for year ended 30 June 20x7
Sales (net) / 117900
Less: Cost of goods sold / 62498
Gross profit / 55402
Add: Other operating income / 306
Discount received / 306
Total income / 55708
Less:Operating expenses / 34220
Marketing / 7300
Advertising / 1400
Cartage outwards / 1500
Sales commission / 4400
Administration / 22980
Insurance / 800
Depreciation / 7000
General expenses / 3500
Salaries and wages / 11680
Financial / 3940
Discount allowed / 720
Doubtful debts / 220
Interest on mortgage / 3000
Net profit / 21488
Note: The heading of the income statement is for a given period. Also note particularly the sub-headings under the main heading of operating expenses. The sub-headings are:
- marketing (also known as selling and distribution): includes any expense related to selling goods or services
- administration(also known as general and administration): includes all expenses not involved in marketing (see above) or finance (see below)
- financial: includes the expenses incurred in obtaining or maintaining funds to operate the business.
Note also that the amounts shown in the income statement include any adjustment required by the balance day adjustments.
/ Activity 1From the records for the business In Sufficient presented below, prepare a classified income statement.
Feedback for this activity is provided at the end of this document.
Balance day adjustment general journal entries
General journal of
In Sufficient
20x7
June 30 / General salaries / 1 200
Expenses accrued / 1 200
Salaries due – not paid
Expenses prepaid / 1 600
Advertising / 1 600
Advertising paid in advance
Bad debts / 1 000
GST clearing account / 100
Accounts receivable control / 1 100
Bad debt written off
Income accrued / 300
Commission income / 300
Income due – not received
Depreciation – Plant and equipment / 34 200
Accumulated depreciation / 34 200
Plant and equipment
Depreciation charge for year
General ledger
In Sufficient
Inventory
20x7June 30 / Balance / 30 600
Bank
20x7June 30 / Balance / 22 400
Accumulated depreciation – Plant and equipment
20x7June 30 / Balance / 33 000
Dep – Plant & equipment / 34 200
67 200
GST clearing account
20x7 / 20x7June 30 / Account receivable / 100 / June 30 / Balance / 6 000
Balance c/d / 5 900
6 000 / 6 000
Balance b/d / 5 900
Sales
20x7 / 20x7June 30 / Trading / 349 000 / June 30 / Balance / 349 000
Cost of goods sold
20x7 / 20x7June 30 / Balance / 267 000 / June 30 / Trading / 267 000
General salaries
20x7 / 20x7June 30 / Balance / 51 800 / June 30 / Profit and loss / 53 000
Expenses accrued / 1 200
53 000 / 53 000
Accounts receivable
20x7 / 20x7June 30 / Balance / 10 800 / June 30 / Bad debts / 1 100
Balance c/d / 9 700
10 080 / 10 080
20x7 Jul 1 / Balance b/d / 9 700
Plant and equipment
20x7June 30 / Balance / 182 600
Accounts payable
20x7June 30 / Balance / 10 200
Capital
20x7 / 20x7June 30 / Profit and loss / 43 100 / June 30 / Balance / 228 400
Drawings / 22 600
Balance c/d / 162 700
228 400 / 228 400
20x7 July 1 / Balance b/d / 162 700
Drawings
20x7 / 20x7June 30 / Balance / 22 600 / June 30 / Capital / 22 600
Commission income
20x7 / 20x7June 30 / Profit and loss / 700 / June 30 / Balance / 400
Profit and loss / 300
700 / 700
Advertising
20x7 / 20x7June 30 / Balance / 11 800 / June 30 / Expenses prepaid / 1 600
Profit and loss / 10 200
11 800 / 11 800
Electricity and phone
20x7 / 20x7June 30 / Balance / 18 800 / June 30 / Profit and loss / 18 800
General expenses
20x7 / 20x7June 30 / Balance / 6 400 / June 30 / Profit and loss / 6 400
Expenses accrued
20x7June 30 / General salaries / 1 200
Bad debts
20x7 / 20x7June 30 / Accounts receivable / 1 000 / June 30 / Profit and loss / 1 000
Depreciation – Plant and equipment
20x7June 30 / Accumulated depr.
Plant and equipment / 34 200 / 20x7
June 30 / Profit and loss / 34 200
Discount allowed
20x7 / 20x7June 30 / Balance / 2 200 / June 30 / Profit and loss / 2 200
Expenses prepaid
20x7June 30 / Advertising / 1 600
Income accrued
20x7June 30 / Commission income / 300
Trading account
20x7 / 20x7June 30 / Cost of goods sold / 267 000 / June 30 / Sales / 349 000
Profit and loss account / 82 000
349 000 / 349 000
Profit and loss account
20x7 / 20x7June 30 / Advertising / 10 200 / June 30 / Trading account / 82 000
General salaries / 53 000 / Commission income / 700
Electricity and phone / 18 800 / Capital account / 43 100
General expenses / 6 400
Discount allowed / 2 200
Bad debts / 1 000
Depreciation plant and equipment / 34 200
125 800 / 125 800
Closing general journal entries
General journal of In Sufficient
Date / Account / Folio / Debit $ / Credit $20x7 June 30 / Sales / 349 000
Trading account / 349 000
Balance transferred
Trading account / 267 000
Cost of goods sold / 267 000
Balance transferred
Trading account / 82 000
Profit and loss / 82 000
Gross profit transferred
Commission income / 700
Profit and loss account / 700
Balance transferred
Profit and loss account / 125 800
Advertising / 10 200
General salaries / 53 000
Electricity and phone / 18 800
General expenses / 6 400
Discount allowed / 2 200
Bad debts / 1 000
Depreciation plant and equipment / 34 200
Balance transferred
Capital / 43 100
Profit and loss account / 43 100
Net loss transferred
Capital / 22 600
Drawings / 22 600
Balance transferred
In Sufficient
Adjusted trial balance as at 30 June 20x7
Debit $ / Credit $
Inventory / 30 600
Accounts receivable / 9 700
Bank / 22 400
Plant and equipment / 182 600
Accumulated depreciation – plant and equipment / 67 200
Accounts payable / 10 200
GST clearing account / 5 900
Capital / 162 700
Expenses accrued / 1 200
Expenses prepaid / 1 600
Income accrued / 300
247 200 / 247 200
Commentary
- The balance day adjustments have affected expense and income balances. In addition, two asset accounts (expenses prepaid and income accrued) and one liability account (expenses accrued) have been introduced.
- The closing general journal entries have closed off all the income and expense accounts, after the balance day adjustments to trading and profit and loss accounts.
- The balance of profit and loss account (a loss in this case) and drawings have been transferred to the capital account.
- Then, the accounts left open in the general ledger with balances make up the adjusted trial balance. The accounts are assets, liabilities and owner’s equity (capital).
Balance sheet
Recall that after the transfer of net profit or loss from the profit and loss account to the capital account and the transfer of drawings to the capital account the remaining accounts with balances in the general ledger are assets, liabilities and owner’s equity (capital).
These accounts form the balance sheet. The balance sheet sets out the financial position of the business as at a specified date, hence the heading is ‘as at’ a given date.
/ Now go to Resource 2In the balance sheet for WKenny note that the heading should read ‘as at 30 June 20x7’ and not ‘for the year ended’.
The balance day adjustments affecting assets and liabilities, eg accrued salaries and prepaid advertising, are reflected in the balance sheet.
The headings must be in the format shown, that is:
Current assets—cash or assets generally convertible into cash within 12months
Non-current assets—assets to be kept beyond 12 months
Total assets
Current liabilities—liabilities expected to be paid within 12 months
Non-current liabilities—liabilities expected to be paid beyond 12months
Total liabilities
Net assets
Owner’s equity (not capital as shown)
Capital
Add: Profit
Less: Drawings
Note that under owner’s equity the capital account for the period is restated, that is:
CapitalDrawings / xxxx / Opening balance / xxxx
Profit and loss (net profit) / xxxx
/ Activity 2
Prepare a balance sheet from the adjusted trial balance of the previous example for In Sufficient.
Feedback for this activity is provided at the end of this document.
/ Activity 3Prepare an income statement and balance sheetfrom the solution to Activity1.
Feedback for this activity is provided at the end of this document.
/ Activity 4From the following additional information and trial balance for the business Nightingale, prepare the following:
(a)general journal entries for the balance date adjustments
(b)closing general journal entries
(c)trading account
(d)profit and loss account
(e)balance sheet.
Additional information
- Advertising of $400 was prepaid.
- Office wages owing are $1600.
- Depreciation on delivery vans was $10 000.
- Depreciation on building was $6000.
- Provide for doubtful debts at 5% of accounts receivable.
- A physical stocktake disclosed an inventory value of $21 700.
Nightingale trial balance
as at 30 June 20x7
Sales / 98 000
Commission income / 4 000
Cost of goods sold / 37 500
Advertising / 2 000
Discount allowed / 1 500
Discount received / 500
Selling expenses / 2 600
Office wages / 1 750
Stationery / 400
Insurance / 800
Electricity / 800
Cash at bank / 16 000
Accounts receivable / 18 000
Inventory / 22 000
Land / 40 000
Buildings / 80 000
Accumulated depreciation – Building / 20 000
Delivery vans / 50 000
Accumulated depreciation – Delivery vans / 10 000
Accounts payable / 6 200
GST clearing account / 7 800
Mortgage – Due 30 June 20x9 / 20 000
Capital – JHopkins / 108 850
Drawings / 2 000
275 350 / 275 350
Feedback for this activity is provided at the end of this document.
/ Activity 5From the following additional information and trial balance for the business Seal & Co, prepare the following:
(a)general journal entries for the balance day adjustments
(b)closing general journal entries
(c)income statement
(d)balance sheet.
Additional information relating to 30 June 20x7
- Rent income received in advance was $600.
- General wages due and unpaid was $1 200.
- Insurance paid in advance was $500.
- Depreciation of motor vehicles was $8800 and on office equipment was $1100.
- Accounts receivable are considered doubtful to the extent of 4%.
- Provide for long service leave of $5000 (due after 30th June 20x8).
Seal and Co.
Trial balance as at 30 June 20x7
Capital / 137 900
Drawings / 4 000
Bank / 6 000
Inventory / 17 200
Account receivable / 26 000
Accounts payable / 9 000
GST clearing / 5 000
Land & buildings at cost / 224 000
Fixtures & fittings at cost / 11 000
Office equipment at cost / 22 000
Accumulated dep. – Office equipment / 2 300
Motor vehicles at cost / 44 000
Accumulated dep. – Motor vehicles / 5 200
Mortgage on freehold – Due 30 June 20x8 / 108 000
Sales / 472 760
Cost of goods sold / 247 900
Rent income / 5 000
Salaries – Sales / 43 000
Advertising / 4 400
Salaries – Office / 44 000
Insurance / 1 700
Discount allowed / 2 400
Discount received / 2 240
General wages / 46 000
Commission – Sales / 3 000
Telephone / 1 360
Bad debts / 240
Motor vehicle expenses / 4 700
Office expenses / 6 500
753 400 / 753 400
Feedback for this activity is provided at the end of this document.
/ Activity 6From the following trial balance and additional information for Acme Trading prepare the:
(a)general journal entries for balance day adjustment
(b)income statement
(c)balance sheet.
Feedback for this activity is provided at the end of this document.
Acme Trading
Trial balanceas at 30 June 20x7
Capital / 29 956
Drawings / 200
Sales / 7 580
Travelling expenses for sales people / 320
Wages – Sales / 2 400
Inventory / 6 000
Electricity / 600
Cost of goods sold / 1 420
Interest income / 160
Interest expense / 96
Rates / 100
Buildings / 6 000
Accounts receivable / 4 000
Accounts payable / 4 000
GST clearing account / 1 600
Allowance for doubtful debts / 140
Insurance / 200
Bills receivable / 600
Bills payable / 500
10% Commonwealth bonds – Due 30 June 20x9 / 2 000
Bank / 1 200
Loan from Blue Rory – Due 30 June 20x9 / 1 200
Machinery / 20 000
$45 136 / $45 136
Additional information
- Provide for depreciation on: machinery $2000; buildings $300.
- Bad debt to be written off is $220 including GST.
- Allowance for doubtful debts is to be adjusted to 5% of current trade accounts receivable (after bad debt write-off).
- Accrued wages at 30 June 20x7 were $70.
- Insurance paid in advance is $60.
- Accrued interest income on bonds is $40.
Feedback to activities
Activity 1
In Sufficient
Income statement
for year ended 30 June 20x7
Sales / 349 000
Less: Cost of goods sold / 267 000
Gross profit / 82 000
Add: Other income
Commission income / 700
Total income / 82 700
Less:Operating expenses / 125 800
Marketing / 10 200
Advertising / 10 200
Administration / 112 400
General salaries / 53 000
Electricity and phone / 18 800
General expenses / 6 400
Depreciation – Plant and equipment / 34 200
Financial / 3 200
Discount allowed / 2 200
Bad debts / 1 000
Net loss / 43 100
Activity 2
In Sufficient
Balance sheet
as at 30 June 20x7
Current assets / 64 600
Inventory / 30 600
Accounts receivable / 9 700
Bank / 22 400
Expenses prepaid / 1 600
Income accrued / 300
Non-current assets / 115 400
Plant and equipment / 182 600
Less: Accumulated depreciation / 67 200 / 115 400
Total assets / 180 000
Current liabilities / 17 300
Accounts payable / 10 200
GST clearing account / 5 900
Expenses accrued / 1 200
Non-current liabilities / _
Total liabilities / 17 300
Net assets / 162 700
Owner’s equity / 162 700
Capital 1 July 20x6 / 228 400
Less: Loss / 43 100
185 300
Less: Drawings / 22 600
Activity 3
Jack Straw
Income statement
for year ended 30 June 20x8
Sales / 329 643
Less: Cost of goods sold / 195 875
Gross profit / 133 768
Add:Other income / 3 700
Rent income / 3 700
Total income / 137 468
Less:Operating expenses / 75 094
Marketing / 2 862
Advertising / 2 862
Administration / 70 269
Office salaries / 38 915
Rates and taxes / 8 052
Light and power / 10 329
Office cleaning / 5 293
Depreciation – Buildings / 2 600
Depreciation – Motor vehicles / 5 080
Financial / 1 963
Bad debts / 1 059
Doubtful debts / 904
Net profit / 62 374
Jack Straw
Balance sheet
as at 30 June 20x8
Current assets / 87 941
Inventory / 58 565
Account receivable / 18 080
Less: Allowance for doubtful debts / 904 / 17 176
Cash at bank / 11 200
Petty cash / 1 000
Non–current assets / 255 061
Land and buildings / 239 941
Less: Accumulated depreciation / 5 200 / 234 741
Motor vehicles / 25 400
Less: Accumulated depreciation / 5 080 / 20 320
Total assets / 343 002
Current liabilities / 17 942
Accounts payable / 9 280
GST clearing account / 8 087
Income received in advance / 575
Non–current liabilities / –
Total liabilities / 17 942
Net assets / 325 060
Owner’s equity / 325 060
Capital / 280 000
Add: Profit / 62 374
342 374
Less: Drawings / 17 314
Activity 4
General journal
Nightingale Products balance day adjustments
20x7 / Expenses prepaid / 400
June 30 / Advertising / 400
Advertising paid – not due
Office wages / 1 600
Expenses accrued / 1 600
Office wages due – not paid
Depreciation – Delivery vans / 10 000
Depreciation – Buildings / 6 000
Accumulated depreciation –Delivery van / 10 000
Accumulated depreciation – Buildings / 6 000
Depreciation charge for year
Doubtful debts / 900
Allowance for doubtful debts / 900
Allowance for doubtful debts created
Inventory variance / 300
Inventory / 300
Adjusting inventory to physical stocktake
Cost of goods sold / 300
Inventory variance / 300
Balance transferred
Nightingale Products
Closing journal entries
20x7 / Sales / 98 000
June 30 / Trading account / 98 000
Balance transferred
Trading account / 37 800
Cost of goods sold / 37 800
Balance transferred
Trading account / 60 200
Profit and loss account / 60 200
Gross profit transferred
Discount received / 500
Commission income / 4 000
Profit and loss / 4 500
Balance transferred
Profit and loss / 27 950
Advertising / 1 600
Discount allowed / 1 500
Selling expenses / 2 600
Office wages / 3 350
Stationery / 400
Insurance / 800
Electricity / 800
Depreciation – Delivery van / 10 000
Depreciation – Buildings / 6 000
Doubtful debts / 900
Balances transferred
Profit and loss / 36 750
Capital / 36 750
Net profit transferred
Capital / 2 000
Drawings / 2 000
Balance transferred
Nightingale Products
Trading account
20x7
June 30 / Trading account / 37 800 / 20x7
June 30 / Sales / 98 000
Profit and loss / 60 200
98 000 / 98 000
Profit and loss account
Date / Particulars / Fol / Amount / Date / Particulars / Fol / Amount20x7
June 30 / Advertising / 1 600 / 20x7
June 30 / Trading Account / 60 200
Discount allowed / 1 500 / Discount Received / 500
Selling expenses / 2 600 / Commission Income / 4 000
Office wages / 3 350
Stationery / 400
Insurance / 800
Electricity / 800
Depreciation – Delivery van / 10 000
Depreciation – Buildings / 6 000
Doubtful debts / 900
Capital (Net profit) / 36 750
64 700 / 64 700
Nightingale Products
Balance sheet
as at 30 June 20x7
Current assets / 55 200
Inventory / 21 700
Accounts receivable / 18 000
Less: Allowance for doubtful debts / 900 / 17 100
Cash at bank / 16 000
Expenses prepaid / 400
Non–current assets / 124 000
Land / 40 000
Buildings / 80 000
Less: Accumulated depreciation / 26 000 / 54 000
Delivery vans / 50 000
Less: Accumulated depreciation / 20 000 / 30 000
Total assets / 179 200
Current liabilities / 15 600
Accounts payable / 6 200
GST clearing account / 7 800
Expenses accrued / 1 600
Non-current liabilities / 20 000
Mortgage / 20 000
Total liabilities / 35 600
Net assets / 143 600
Owner’s equity / 143 600
Capital / 108 850
Add: Net profit / 36 750
145 600
Less: Drawings / 2 000
Activity 5
General journal
Seal and Co
Balance day adjustments
20x7 / Rent Income / 600
June 30 / Income received in advance / 600
Rent income received – not due
General wages / 1 200
Expenses accrued / 1 200
General wages due – not paid
Expenses Prepaid / 500
Insurance / 500
Insurance paid – not due
Depreciation – Motor vehicle / 8 800
Depreciation – Office equipment / 1 100
Accum. depre. – Motor vehicle / 8 800
Accum. depre. – Office equipment / 1 100
Depreciation charge for year
Doubtful debts / 1 040
Allowance for doubtful debts / 1 040
Allowance for doubtful debts created
Long service leave / 5 000
Provision long service leave / 5 000
Providing for long service leave
Seal and Co
Closing general journal entries
20x7 / Sales / 472 760
June 30 / Trading account / 472 760
Balance transferred
Trading account / 247 900
Cost of goods sold / 247 900
Balance transferred
Trading account / 224 860
Profit and loss account / 224 860
Gross profit transferred
Rent income / 4 400
Discount received / 2 240
Profit and loss account / 6 640
Balances transferred
Profit and loss account / 173 940
Salaries – Sales / 43 000
Advertising / 4 400
Salaries – office / 44 000
Insurance / 1 200
Discount allowed / 2 400
General wages / 47 200
Commission – Sales / 3 000
Telephone / 1 360
Bad debts / 240
Motor vehicle expenses / 4 700
Office expenses / 6 500
Depreciation – Motor vehicle / 8 800
Depreciation – Office equipment / 1 100
Doubtful debts / 1 040
Long service leave / 5 000
Balances transferred
Profit and loss account / 57 560
Capital / 57 560
Net profit transferred
Capital / 4 000
Drawings / 4 000
Balance transferred
Seal and Co
Income statement
for year ended 30 June 20x7
Sales / 472 760
Less: Cost of goods sold / 247 900
Gross profit / 224 860
Add: Other operating income / 6 640
Rent income / 4 400
Discount received / 2 240
Total income / 231 500
Less:Operating expenses / 173 940
Marketing / 50 400
Salaries – Sales / 43 000
Advertising / 4 400
Commission sales / 3 000
Administration / 119 860
Salaries office / 44 000
Insurance / 1 200
General wages / 47 200
Telephone / 1 360
Motor vehicle expenses / 4 700
Office expenses / 6 500
Depreciation – Motor vehicle / 8 800
Depreciation – Office equipment / 1 100
Long service leave / 5 000
Financial / 3 680
Discount allowed / 2 400
Bad debts / 240
Doubtful debts / 1 040
Net profit / 57 560
Seal and Co