Accounting Fundamentals: Income Statement, Balance Sheet, and Ratios

This article covers accounting fundamentals including income statement, balance sheet, and ratios. It includes a case study of Kedison Plc's financial statements and ratios for 2019 and 2020. The article discusses the situation revealed by the ratios and concludes with the importance of accounting in effective business operations.

Accounting
Fundamentals

Contents
INTRODUCTION...........................................................................................................................................3
QUESTION 1.................................................................................................................................................3
1. Prepare Income statement for the year ended 31st December 2019...................................................3
QUESTION 2.................................................................................................................................................5
a. Calculation of various ratios for the organisation................................................................................5
b. Discussion of the situation which is revealed by the ratios.................................................................7
CONCLUSION...............................................................................................................................................7
REFERENCES................................................................................................................................................9

INTRODUCTION
Accounting fundamentals are some of the most important areas of accounting that certain
businesses must pay attention to in order to sustain organizational effectiveness. Accountancy
can utilize financial reports namely the profit and loss account, capital structure, and cash flow
statement when preparing to assess the current state of a firm. All this can assist in analyzing the
current state of the firm and forecasting its future prospects (Menicucci, 2020). It is also critical
for entity organizational leaders to ensure that correct and suitable steps are taken to ensure in the
accounting period so that the true state of the company can be identified. The current study is
meant to evaluate of several elements of accounting that must be addressed by all businesses.
This project includes a variety of subjects, including analyzing financial reports by making
appropriate changes, calculating ratios to identify the current status of a firm, and so on.
QUESTION 1
1. Prepare Income statement for the year ended 31st December 2020
Income statement: The income statement is one of the three key financial accounts that used
reveal a company's financial condition for a predefined timeframe. The balance sheet and the
cash position are all the other two major statements. The income statement, also known as the
financial statements or income and expenditure statement, is a financial statement that focuses on
a company's profits and expenses during a certain timeframe. It is a set of financial statements
that show a company's operational achievements for a specific accounting period (together with
the profit and loss account sheet). Subtracting operating costs from net earnings, includes
operations profits, yields net income (Zhou and et.al, 2020).
The sum of combined manufacturing and non-operating revenue is referred to as an
overall sale, whereas operating expenses comprise both direct and indirect income. Even if
money is created from an income statement and publicized, refunds are not invoices. Such
statement gives information on a company's success, its key motivators, underperforming
segments, and how it compares to its rival companies. Accountants generate revenue and loss
statements for the Kedison Plc, which show the company's net profit or loss (Lerman, 2020).
Prepare an income statement based on the data in the trial balance as of December 31, 2020.

Income statement of Kedison Plc at 31st December, 2019
Particulars Details Amount
Revenue 826650
Less: COGS (578650)
Gross profit 248000
Selling and Administration Expenses:
Distribution Expenses 28000
Administration expenses 30000
Dividends paid 20000
Debenture interest paid 4000
Preference dividend paid 30000
Corporate tax 68000
(190000)
Net Profit 58000
Balance sheet: It is a financial statement for a company that shows its assets, liabilities, capital
ratio, total income, and other financial information at any one time. From the one side, the
balance sheet comprises assets, liabilities, and other items (Raffort, Adam, Carrier and Lareyre,
2020). To give a realistic picture of the financial accounts, all sections of this declaration
(liabilities and assets) will be counted (Assets = Liabilities + Equity). A balance sheet seems to
be a representation of a cash flow forecast at a specific point of time, usually one quarter, 6
months, or even a year. Assets and liabilities are the two primary categories of financial
statements. It's the amount owed to suppliers by the company. Debts are divided into two

categories: present and lengthy obligations. Other important heading in the financial accounts is
stakeholder or owner's equity. The term "resource" refers to a company's typical liabilities as
well as its stockholders' equity. Whenever the company is a sole proprietorship, the value of
equity should be utilized, and once the company is a company, the ownership of the company
must be used. It's also known as the value of a business book (Hann and et.al, 2020). The
business needed to prepare the financial situation of Kedison Plc at the end of 2020.
Balance Sheet
Liabilities Amount Assets Amount
Net profit 5375 Building (Less dep or acc dep) 11420
Retain profit 8380 Plant (Less dep or acc dep) 18120
Trade payable 4480 Land 15000
Debenture 4000 Trade receivable (Less debt) 7835
Share premium 5000 Bank 320
Ordinary shares 29000 Inventory 3120
Insurance fees outstanding 500 Surplus 920
56,735 56,735
QUESTION 2
a. Calculation of various ratios for the organisation
Calculation of different ratios for Chocco Plc is as follows:
Ratio Formula
2020 2019
Calculation Result Calculation Result
Return on Operating profit / capital 805 / 7225 * 11.14% 699/ 7041 * 9.92%

capital
employed employed * 100 100 100
Return on
equity
Net profit / total
shareholder's equity * 100
431 / 3088 *
100 13.95%
366 / 2912 *
100 12.56%
Earnings per
share
Net profit / number of
shares 431 / 17.8 1.03 366 / 17.8 0.72
Gross profit
margin
Gross profit / revenues *
100
3503 / 6738 *
100 33.39%
6441 / 501.3
* 100 38.26%
Asset turnover
ratio Net sales / total assets 6738 / 9736 0.69 6441 / 10087 0.64
Stock holding
period
Inventory / cost of sales *
365
708 / 3235 *
365 79.88
659 / 3096 *
365 77.69
Debtor
collection
period Debtor / sales * 365
1249 / 6738 *
365 67.65
1287 / 6441 *
365 72.93
Current ratio
Current assets / current
liabilities 2303 / 2511 0.9 2355 / 3046 0.77
Gearing ratio Debts / equities 1249 / 3088 0.44 1287 / 2912 0.44
Interest cover
ratio Operating profit / interest 805 / 226 3.56 699 / 181 3.86
Working notes:
Calculation of capital employed
Particulars 2020 2019

Total assets 9736
1008
7
Less: current liabilities 2511 3046
Capital employed 7225 7041
b. Discussion of the situation which is revealed by the ratios
On the basis of the aforementioned ratios, this one has been decided that Chocco Plc's
achievement in 2019 was better than in 2020. The business context is strong, although it was
significantly better in 2019. The individual's return on capital employed, equity, and earnings per
share, result in financial duration, current, gearing, and other ratios are all strong in 2019 as
compared to 2020. It appears that performance of the company has deteriorated in 2020 (Xiao
and et.al, 2020). Aside from that, the enterprise's debtor collection duration has shrunk in 2020,
indicating that the company is able to bounce back the owing amount from debtors in a shorter
period. It has also led to increased sales for the year 2020. Aside from that, the company was
prepared to handle the interest cover for 2020, which is significantly higher than that of 2019. It
demonstrates that the employee's revenue was excellent in 2020, resulting in increased market
confidence during the year (Umar and et.al, 2021).
CONCLUSION
Accounting, as stated in the preceding explanation, is the practice of documenting money
transfers related to a business. Transmission, evaluation, and reporting of these operations to
standard setters, officials, and tax collecting agencies are all part of the accounting technique.
Accounting Financial Statements are a concise summary of financial operations over a certain
timeframe, highlighting a business's revenue, financial position, and future revenues. It is critical
to the effective operation of a corporation because it allows employees to monitor income and
expenses, ensures compliance with regulations, and provides thorough accounting statements for
debtors, executives, and the governments that may be utilised to make strategic choices.
According to the findings of this study, there are three major documentation that executives must
compile in order to develop effective plans. The income statement aids in analysing a company's

total costs and income; the financial statement depicts the profitability and allows owners to earn
financial choices based on it.

REFERENCES
Books and Journal
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Raffort, J., Adam, C., Carrier, M. and Lareyre, F., 2020. Fundamentals in artificial intelligence
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Xiao, X. and et.al, 2020. Preaggregation Matching of Donors and Acceptors in Solution
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