Statements of Financial Position and Income Statements

Financial
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK ..............................................................................................................................................3
1....................................................................................................................................................3
2....................................................................................................................................................4
3....................................................................................................................................................5
4....................................................................................................................................................6
5....................................................................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Financial accounting in business context refers to systematic collection of activities
concerned with recording and monitoring of different financial and accounting transactions of a
business entity (Mulford and Comiskey, 2011). The report contains comparison and contrast of
difference between statements of financial position and income statements, different aspects of
bank reconciliation statement and manner by which control and suspense accounts are
reconciled. This report also includes practical presentation of income statements and balance
sheet of sole trader and limited company.
TASK
1.
Income Statement for the year ended 31st April 2019
Particulars Amount Particulars Amount
To Opening Inventory 160000 By Sales 1400000
To Purchase 840000 By Closing Inventory 100000
To Wages 440000
Add: Outstanding 20000 460000
To Gross Profit 40000
1500000 1500000
To Heat and Light 80000 By Gross Profit 40000
Add: Outstanding gas
payment 8000 72000
To Sundry Expenses 170000
Less: Prepaid Rent 44000 126000
To Depreciation 96000
To Net Profit -254000
Total 40000 Total 4000
Balance Sheet as on 31st April,2019
Liabilities Assets
Capital 960000 Furniture and Fittings 480000
Less: Drawings 110000 Less: Depreciation 96000 384000

Net Profit -254000 596000
Trade Receivables 160000
Bank Overdraft 80000 Inventory 100000
Outstanding Wages 20000 Prepaid Rent 44000
Outstanding Gas
payment 8000 Other Current Assets 16000
Total 704000 Total 704000
2.
Statement of profit & loss account for Kenny Paton as at 31st August, 2019
Particulars Amount
Sales revenue 2064000
less: Cost of sales
(working note-1) -1186000
Gross profit 878000
less: Distribution costs -336000
less: Administration costs -272000
Profit before tax 270000
less: Tax -20000
Profit after tax 250000
Statement of financial position for Kenny Paton as at 31st August, 2019
ASSETS Amount
Non current assets
Tangible assets
Premises 1232000
Property, plant &
equipment (working note-
816000

2)
Current assets
Trade receivables 608000
Bank 32000
Inventory 78000
Total assets 2766000
EQUITY & LIABILITIES
Equity
Ordinary share capital 1328000
Reserves (working note-4) 117200
Non current liabilities
5 year 13% loan 528000
Dividend (working note-3) 132800
Current liabilities
Trade payables 640000
Tax 20000
Total equity & liabilities 2766000
Working notes:
1) Cost of sales:
Particulars Amount
Opening inventory 96000
Purchases 1024000
Less: closing inventory -78000
Depreciation: plant & equipment 115200
Office equipment 28800

Total 1186000
2) Property, plant & equipment:
Particulars Amount Amount
Cost 768000 192000
Less: depreciation -115200 -28800
Total 652800 163200
3) Dividend:
10% of share capital = 1328000*10%
= 132800
4) Reserves:
Profit – dividend = 250000 – 132800
= 117200
3.
Income statement and statement of financial position is part of organisation's books of
accounts. Main purpose of preparation of books and accounts is to assess the actual performance
of business organisation. For corporates reporting of financial accounts is required as per statute.
Financial statements are prepared by business entities on annually basis (Warren, Reeve and
Duchac, 2013). Organisation's also prepares income statements and balance sheet for unspecified
period such as quarterly or half yearly for internal analysis. Following are the key difference
between income statements and statement of financial position, as discussed below:
Timing: Statement of financial position is prepared by organisation to assess the performance as
on a particular date. It represent organisation's status in terms of liabilities and assets value on a
particular point of time. On other side income statements is prepared by business entities for a
specific or particular period of time. It exhibits overall profitability performance of company
during a specific period.
Items reported: Through statement of financial position business entities reports liabilities and
assets of companies. It contains value of assets and liabilities of company to assess the overall
performance at particular date (Openshaw, 2013). On other hand income statement business

entities reports its all kind of expenses and incomes earned or deemed to be earned during a
period to provide net assessment of organisation's profitability.
Metrics: Different items reported in statement of financial statement presents comparative data
to asses liquidity position of company. Whereas income statement provide a comparison to
provide a base for calculation of operating income margin, gross profit margin, percentage of net
income etc.
Uses for management: Income statement is used by a business entity to analyse and evaluate
the organisation's efficiencies to generate profits. It also applied by managerial personnels to
recognise financial issues and operating problems within organisation. Whereas statement of
financial position is mainly used by managerial personnels to asses the efficiency of organisation
to pay its obligations. Main emphasises of mangers is towards analysis of liquidity position of
company.
Uses for lenders and creditors: Statement of financial position is used by creditors to analyse
the organisation's funding structure to determine entity is over or under leveraged. It also help
them to take appropriate decision-making about extension of credit period. Whereas income
statements used by creditors to know whether company is able to generate sufficient to repay
their debts within reasonable time. It also assist new creditors to choose whether to provide credit
limits to organisation.
Relative Importance: Income statement is relatively more important as compare to statement of
financial position because most of the stakeholders are interested in organisation's net
profitability condition. Whereas statement of financial position provides only overview about
organisation's position.
4.
Bank reconciliation Statement:
A BRS or bank-reconciliation statements is like an adjustment account that represents
key differences between the balance of cash book's bank balance and bank pass book. Main
motto of preparation of BRS is to evaluate and identify the main reason of difference of such
balance. It also recognise any error, misrepresentation and omission in recording transaction and
balance (Bank Reconciliation Statement. 2018). Accounts by using BRS, accountants checks
general accounts and balance sheet to identify main cause of variations and then reconcile them

to present correct value of Bank and cash in hand in balance sheet. Following is an example of
BRS, as follows:
Type 1. When adjustment are made in bank balance as per passbook:
Bank-reconciliation Statement
Bank balance as per
pass book 450
Add:
Deposit in transit 125
Outstanding Deposits 105
Not Sufficient
fund(NSF) Cheque 75
Bank charges 65
Adjustment for direct
debit rates 115 485
Less:
Outstanding Cheques
Ch. No. 10084 102
Ch No. 10089 124 226
Bank balance as per
cash book 709
Type 1. When adjustment are made in bank balance as per cash book:
Bank-reconciliation Statement
Bank balance as per
cash book 709
Add;:
Outstanding Cheques
Ch. No. 10084 102
Ch No. 10089 124 226

Less:
Deposit in transit 125
Outstanding Deposits 105
Not Sufficient
fund(NSF) Cheque 75
Bank charges 65
Adjustment for direct
debit rates 115 485
Bank balance as per
pass book 450
5.
Manner of reconciliation of Control Account: A control account is prepared by accountants
contains all ledgers' balances and values to summarise them effectively. Control accounts work
as a internal check over accounting process. There are two major controls are prepared by
accountants: Sales control account and Purchase control account (Vyas, 2011). At the time of
reconciliation accountants ensures that the amount of sales and purchase ledgers are consistent
with controls accounts. Following is a illustration of control accounts:
Purchase Ledger Control Account
Dr Cr
Details Amount Details Amount
Discount 1300 Balance b/d 20100
T/f from sales ledger 1400 Purchases: Credit 137500
Purchase return 100000 Paid to suppliers 110000
Refund from supplier 1500
Balance c/d 163400
267600 267600
Sales Ledger Control Account
Dr Cr

Details Amount Details Amount
Balance b/d 23000 Bad debts 1200
Credit sales 170000 Discount allowed 1400
Receipts from credit customer 150000 Sales return 18000
Transfer to purchase ledger 1450
Balance c/d 320950
343000 343000
Manner of reconciliation of Suspense Account: A suspense account is prepared by accountant
for short and unspecified period to record unallocated and unidentified balance and values. At
the time of finalisation of book and accounts such balances are transferred to their respective
accounts (Ward, 2012). Accountants reconcile suspense account by identify source of balances
and values recorded in suspense account, and finally allocate such amounts to different ledgers.
Following is illustration of suspense account:
A supplier of goods is invoiced for $1500 of goods. Accountant is unsure or confuse
about under which head this expense is to be charged, Then he can transfer this amount to
suspense account by debiting suspense account and crediting account of creditors:
Account Debit Credit
Suspense Account Dr.1500
Accounts Payable 1500
At the time of preparation of final account accountant decided to record such bill and he
analysed that such bill is belongs to purchase department. So in order to close suspense account,
by crediting suspense account and debiting supplies account in respect of purchase department.
Account Debit Credit
Suspense Account Dr. 1500
Supplies – Purchase Department 1500
Difference between control and suspense account: