Topic 7: Basic Financial Statements - Book Keeping Notes Form One New Syllabus - Darasa Huru

Topic 7: Basic Financial Statements – Book Keeping Notes Form One New Syllabus

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Book-Keeping Form One Notes New Syllabus, Topic 7: Basic Financial Statements - Book Keeping Notes Form One New Syllabus, Trial Balance, Meaning of Books of Prime Entry: Books of prime entry: Are the books in which transactions are recorded before being posted to their respective ledgers. Books of prime entry: Are the books of account that are used to record any transaction for the first time. When a particular transaction has occurred for the first time in a business should be entered into the primary books known as books of prime entry/books of original entry/ subsidiary books/daily books/ journals before being posted to their respective ledger accounts. The word Journal is adopted from a French word which means “daily recording” THE TYPES OF BOOKS OF PRIME ENTRY: There six (06) types of books prime entry which are; Purchases day book (purchases journal) Sales day book (sales journal) Purchases returns day book (Returns outwards journal) Sales returns day book (Returns inwards journal) Cash book Journal proper (General journal) USE OF BOOKS OF PRIME ENTRY: The following are brief descriptions and purpose of each of the book of prime entry: Purchases day book (purchases journal) this journal is used to record details of goods bought by the business with the promise that payment will be made in the future. Purchase returns daybook (purchase returns journal): the purchase returns daybook is used to record transactions related to purchase returns, or returns of goods to suppliers who supplied goods on credit (creditors). Sales day book (sales journal): is the journal used to record details of goods sold on credit with the promise that payment will be received in the future. Sales returns daybook (sales returns journal): this book is used to record details of transactions related to sales returns, or returns of goods from customers to whom goods were sold on credit (debtors). Cash book: is the book used to record transactions related to receipt and payment of cash as well money placed into the bank (bank deposits) and those taken from the bank (bank withdrawals). Cash book is divided into different categories which are Single columns cash book. Two columns’ cash book. Three columns’ cash book. Petty cash book General journal (journal proper) this book of prime entry is used to record transactions related to other items, which according to their nature are not recorded in any other books of prime entry. SOURCE DOCUMENTS/ACCOUNTING INFORMATION: These are documents from which transactions to be recorded in the books of prime entry are extracted. They are documents used in the books of prime entry. These documents are used in the books of prime entry. Source documents can be summarized as follows INVOICE This is a document issued when goods are sold or bought on credit. Sales invoice is issued when goods are sold on credit whereas purchases invoice is issued when credit purchases are made. Invoices are used in preparation of sales day book and purchases day book. DEBIT NOTE is the document prepared and sent by the seller to the buyer to adjust undercharges on the invoice. This document is used by the buyer in preparation of Purchases returns day book/ Returns outwards journal CREDIT NOTE is the document sent by the seller to the buyer to correct an overcharge on an invoice. This document is used in preparation of sales returns day book/ returns inwards journal. CHEQUE: This is a written order by a customer to his/her bank to pay a specified sum of money to the named person at a specific period of time. Is the document used by the drawer to withdraw cash from his or her account. This document is used in preparation of a cash book. PAY-IN-SLIP: This is a bank deposit form filled in by depositor and stamped by a teller as evidence of accepting the deposit. WITHDRAW SLIP: This is a document filled by a person withdrawing money from the bank upon being accepted by the bank teller. CASH RECEIPT/ CASH RECEIPT VOUCHER: is the document that acts as proof that cash has been received. Money could be received from customer for cash sale of goods or goods, or cash received when a credit customer settles his or her debt with the business. PAYMENT VOUCHER: is the document that presents evidence that money has been paid. Money might be paid to the supplier for cash purchase of goods or service or settlement of account payable for goods previously bought on credit. PETTY CASH VOUCHER: is the document used by a petty cashier as evidence for making small payment from petty cash fund. This document is used in preparation of Petty Cash Book. STATEMENT OF ACCOUNT: is the document sent by the seller to the buyer at the end of every period (usually each month) acting as a reminder to the buyer to pay the outstanding balance. JOURNAL VOUCHER: is the document that provide evidence of authorization for all transaction other than those which are evidenced by the previously mentioned source documents. This document is used in the preparation of General journal or Journal proper. PREPARATION OF BOOKS OF PRIME ENTRY: As per the accounting cycle or process introduced in chapter one, once transactions are identified they are entered in the books of prime entry, followed by posting the entries to relevant ledgers account. In section, you are going to learn the six special journal and how information from source documents is entered followed by the general journal. CASH BOOK: This is a book where receipts or payments are recorded. This book is both a ledger and a book of prime entry. Receipts and payments entered in on debit side and credit side respectively. Receipt/cheque: are documents which are used to obtain information to prepare Cash book. Moreover, an account has four columns in both Dr and Cr sides of account namely: The format of a Cash account is illustrated below; DR CASH BOOK CR Date Particulars Folio Amount Date Particulars Folio Amount Date column: Is the column used to record the date at which the given transaction took place. Particulars/narration/details: Is the column used to record a short description of the transactions that took place. Folio column: is the column used to record the reference page in books of account. Amount column: is the column used to record the amount of money that used in purchasing or selling the goods. Example 1: Kafuku commenced business on 1st January 2022 with Capital in cash TZS 200,000. Her transactions during the month were as follows: January 2. Purchased goods for cash 40,000 3. Sold goods for cash 10,000 3. Paid rent for cash 60,000 4. Cash purchases 16,000 6. Paid postage charger 1,000 13. Commission received for cash 50,000 17. Paid salaries for cash 9,600 19. Paid adverting expenses for cash 7,000 24. Bought furniture for cash 10,000 28. Paid wages for cash 16,000 Required: Draw up a cash book, balance it and bring down the balance to the following months DR. CASH BOOK CR. Date Particulars Folio Amount Date Particulars Folio Amount 2022 2022 Jan. 1 Capital 2 200,000 Jan. 2 Purchases 3 40,000 3 Sales 4 10,000 3 Rent 5 60,000 13 Commission 7 50,000 4 Purchases 3 16,000 Received 6 Postage 6 1,000 Charges 17 Salaries 8 9,600 19 Advertising 9 7,000 Expenses 24 Furniture 10 10,000 28 Wages 11 16,000 31 Balance c/d 100,400 260,000 260,000 Feb. 1 Balance b/d 100,400 Example 2: Moshi & his Son Islam started business with a capital of Tsh 60000, on 1st September 2022. During the month the following transaction took place: – Sept 2, Purchased of goods for cash Tsh 3000 Sept 4, Paid carriage charge Cash Tsh 2000 Sept 6, Paid Transport charge Cash Tsh 4000 Sept 8, Bought Motor Vehicle for cash Tsh55000 Sept 10, Cash Sales Tsh 44000 Sept 12, Paid Rent for Cash Tsh1500 Sept 15, Paid commission charge Tsh 1000 Required: Records the above transaction into Cash book account and bring down the balance as on 30th September 2022. DR CASH ACCOUNT CR SALES DAY BOOK Sales day book is in which sales made on credit are recorded. It is a book of original entry that contains the list of credit sales made in a business. It is also known as sales journal Sales invoice: is a document prepared and issued by a seller to the buyer containing information about goods sold on credit. This information includes name, quantity and prices of the products sold. Format of the sales day book: The sales day book has six columns which are: Date: this column is used to write the date, month, and the year of the transaction. Generally, it shows when the transaction took place. Particulars: this column gives a short description of the entry for the transaction recorded. Folio: this column records page of reference in books of accounts.it indicates in what ledger and on what page the transaction has been posted. Invoice number: this column records the details of the invoice number which identify the invoice received when a particular transaction was made. Invoice details: this column records the details of the invoice involved in the transaction. Invoice total: this column records the total amount of money being transacted. SALES DAY BOOK Date Particulars Folio Invoice Details Invoice Total Example 1. Co-operative shop made the following purchases during the month of August, 2021. August 1. Credit sales to Mwangomo 100 bags of Rice @ 550/= 50 bags of sugar @ 750/= August 5. Sold to Dons and Sons Ltd. 10 boxes of cooking fat @ 320/= 12 pairs of sandals @ 150/= August 10. Credit sales to Shilabela Traders. 20 pairs of bed sheets @ 170 50 shirts @ 350/= August 15. Sold to Michael and Sons Ltd 2 cartons of Malaika soap @ 500/= Required: Draw up the Sales journal for the months. SALES DAY BOOK/SALES JOURNAL Example 2. On 1stDecember 2022 Mr. Kasoma started the business and the Transaction during the year was as follows: Dec 1stSold the following goods to Kimatah Gilagiza companies 5 Crown colour each Tshs 7,000 11 Cement each Tshs 22,000 4 Cartons of Nyati cola each Tshs 11,000 10th Dec 2022. Said Mrisho Kanyegeli supplier of Mwamgongo village received the following item sold to him. 6 Boxes of cigarette @ 5000 9 Carton of shoes shs 4500 per carton 10 Boxes of Tanga milk shs 9000 @ 16th Dec 2022, Sold the following items to Mwimbe General Supplier 15 Boxes of shoes @ Shs 12,000 60 Crates of Coca-Cola @ 23,00 10 Breads @ 850 and 6 cakes @ 2,500. Required: Enter the above transactions in the Sales Journal Answer Mr. KASOMA SALES JOURNAL PURCHASES DAY BOOK/ PURCHASES JOURNALS This is a book of original entry where credit purchases are recorded before being posted to the ledger. It contains amount of goods are bought on credit. Purchases invoice: is the document that used in preparation of purchases day book. Note: Cash Purchases are not entered in the purchases journal. Format of the purchases journal: The sales day book has six columns which are: Date: this column is used to write the date, month, and the year of the transaction. Generally, it shows when the transaction took place. Particulars: this column gives a short description of the entry for the transaction recorded. Folio: this column records page of reference in books of accounts.it indicates in what ledger and on what page the transaction has been posted. Invoice number: this column records the details of the invoice number which identify the invoice received when a particular transaction was made. Invoice details: this column records the details of the invoice involved in the transaction. Invoice total: this column records the total amount of money being transacted. PURCHASES DAY BOOK, Application of the Double Entry System, The accounting equation Accounting equation is the equation that shows resources owned by a business against those due to others (liabilities). Accounting equation is the equation that show the relationship between assets, capital and liabilities. Assets: are resources that an enterprise controls and uses to conduct its business. Capital or owner equity: is the amount of resources contributed by the owner. Liabilities: are resources in the business supplied by non-owners of the business. They are obligations that a business has to settle by means of transferring resources to other persons or business. At a point when the business has just started, the total value of assets equals the value of capital: When a business has resources supplied by the owner of the business and others who do not own the business, the accounting equation changes as follows: The equation can also be changed or written in words as follows: Example 1. Complete gaps in the following table. S/n Assets TZS Liabilities TZS Capital TZS a) 5000,000 720,000 ? b) 1,120,000 196,000 ? c) 6,720,000 ? 5,000,000 d) 7840,000 ? 6,580,000 e) ? 4,660,000 1,580,000 f) 2,520,000 7,680,00 ? Solution: From the accounting equation which state that Question 1; Complete the following table STATEMENT OF AFFAIRS: is the statement which shows the list of all assets and liabilities (together with their financial value) at a particular date to enable one calculate value of capital. STATEMENT OF AFFAIRS: Is the statement shows the figures of assets and liabilities to determine the amount of capital. This approach is specifically helpful in a situation where one knows the assets and liabilities of the business and wants to calculate the figure if capital. The effects of revenue and expenses on the equity element of accounting can lead to an extended accounting equation which appears as follows Arithmetically, this equation can be re-arranged. Foe ease of understanding the double entry principle, the re-arrangement of the extended accounting equation is as follows: FORMAT OF A STATEMENT OF AFFAIRS: Statement of Affairs as at (date, Month, Year) Example 1. Kyela Business Enterprise has invested in farming activities. They do not keep complete books of accounts. However, the following information is available as at 31st December 2020. Prepare statement of affairs to calculate amount of capital. Example 2. Mr. Salim has the following transaction took place during the year 2023 December 31st. you are required to calculate capital and prepare the initial statement of the affairs. CONCEPT OF DOUBLE ENTRY: The accounting equation is the foundation of the concept of double entry. Double entry deals with the recording and posting of business transactions in the books of accounts. Business transactions are posted to ledger accounts following principle of double entry. Meaning of double entry system: This is the principle which calls for recording each business transactions twice in the books of accounts. The principle of double entry states that, every business transaction should be recorded twice, that is, every debit entry must have its corresponding credit entry of the same amount. Therefore, one side of the account receives while the other side gives depending on the nature of transaction. Double entry is the most commonly used system of book keeping based on the principle that every financial transaction involves the simultaneous receiving and giving of value, and is therefore recorded twice. IMPORTANCE OF DOUBLE ENTRY:, Basic Principles of Book-Keeping, Introduction to Book-Keeping
   

Topic 7: Basic Financial Statements – Book Keeping Notes Form One New Syllabus

Introduction

Basic financial statements provide business stakeholders, such as investors, creditor and manager with a comprehensive understanding of a business financial performance and position.

In this chapter you learn concept of financial statements, an income statement, a statement of financial position and how to prepare them.

Concept of Financial Statements

Meaning of financial statements:

Financial statements: are reports prepared at the end of a trading period in order to determine the performance and the reliable financial position of a business during the particular financial year.

Financial statement: are statements that are prepared periodically to present the results of the business for the period.

There are four basic financial statements which are;

  • Income statement (trading and profit or loss account0
  • Statement of financial position (balance sheet)
  • Statement of change in equity
  • Statement of cash flows (Cash flows statement)

NOTE: in this chapter will focus only on two financial statements which are income statements and statement of financial position.

PURPOSE OF FINANCIAL STATEMENTS:

Show profitability of the business: income statements help the businessman to identify if the business generating profit or loss during a particular period of time.

Show the financial position of the business: through statement of financial position, it helps to identify the amount of assets, capital/equity and liabilities of the business during a certain period of time.

Assessing the efficiency of business operations: efficiency of business is measured through assets utilization and frequency of stock movements (stock turnover).

Facilitate compliance with tax laws: profit and sales figures provide a reasonable basis for calculating taxes related to turnover or profits. These figures can be easily obtained from the business financial statements.

Facilitate planning and evaluation: this can be done through comparing the targets established at the beginning of the year with the actual results that are obtained from the financial statements.

Establish the riskiness of the business: risk refer to the possibility of danger, loss, injury or other negative outcomes. financial statements help to provide information that help stakeholders to have answers for their questions including the risks associated with the business.

USERS OF FINANCIAL STATEMENTS/ ACCOUNTING INFORMATION

These are groups of individuals, entities and organizations that rely on accounting information/financial statements to make various decisions.

These are parties that use the accounting information for specific purposes.

The users of accounting information can be divided into two groups, internal users and external users.

The following are the users of financial statements/accounting information;

INTERNAL USERS

Internal users are parties that have direct access to the resources of an entity and usually involved in management of the entity, for example, the management, employees and owners.

Owners/ shareholders: These parties provide capital for the running of the entity. They need accounting information to know the profitability and the financial position of the concern in which they have invested their funds.

Management: they are appointed to supervise the day-to-day activities of the company or any other business firm by the owners. They need and use the information to plan and control the entity’s activities.

Employees: employees need information about the financial stability and profitability of their employer/ company. An assessment of profitability can help employees to reach a view on the ability of the employer to pay higher wages, or provide more job opportunities in the future

EXTERNAL USERS

External users are parties who do not have direct access to the resources of the company and are not involved in the management of the company.

Lenders/bankers: these include suc 2-h institutions as banks, to assess the continuing ability of the borrower to pay interest, and its ability to repay the loan principal at maturity various ministries and departments have interest in the firm’s accounting reports as the basis for taxation, enactment of laws for the industry, provision of social services to the people.

Government and their agencies: It also wants to ensure that the firms comply with the laws on wage payments and employee benefits.

Creditors/ Suppliers: they can use financial statements to assess how much credit they might safely allow to the entity. Also, their interest lies in solvency, liquidity and profitability positions of the business enterprise.

Prospective investors: these are firms or individuals who are interested in investing money in an organization/ company. They are interested in knowing the financial strength of the company, i.e. profitability and financial position before making decisions whether to or not to invest.

Customers/debtor: they are interested to know the continuity of operations of the entity and regular supply goods or services.

INCOME STATEMENT (TRADING AND PROFIT OR LOSS ACCOUNT)

Income statement is a statement prepared at the end of trading period to determine whether business is making profit or loss.

It is prepared to ascertain the financial performance of a business.

Income statement has two sections namely;

i. Trading account: is a part of income statement where the amount of gross profit or gross loss is ascertained.

ii. Profit and loss account: is a part of income statement where figure of net profit or net loss is ascertained.

COMPONENTS WHICH ARE INVOLVED IN INCOME STATEMENT:

SECTION A TRADING ACCOUNT:

Opening stock/stock at start {inventory at start}: Is the stock available in the business at the beginning of trading period.

Purchases: These are the goods bought for reselling them in order to generate profit.

Carriage inward/ carriage on purchases: these are cost incurred for transporting goods bought to the business premises. These are the expenses related with purchases and are added to purchases.

Returns outward/ Purchases Returns: These are the goods returns to the supplier either due to damage or expired or are not to the sample ordered and are deducted from purchases.

Net purchases: is obtained by taking total amount of purchases plus carriage inward minus return outward. Formula,

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Cost of goods available for sale: this is obtained by taking sum of the figure of opening inventory plus the figure of net purchases. Formula,

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Drawing of goods: These are the goods drawn by the owner of the business for his/her personal uses, this should be deducted from purchases.

Closing stock / stock at close {inventory at close}: These are the stock which remains unsold in the business at the end of trading period.

Cost of goods sold (COGS): is the difference between the figure of the cost of goods available for sale and closing inventory.

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Sales: This means goods have been sold by the business.

Return in ward/Sales returns: They are the goods returned by customers to the seller due either damage or expired or are not of the sample ordered. This should be deducted from sales.

Net sales: is calculated by taking sales less sales returns/return inwards.

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Gross Profit: Is an excess of Sales over cost of goods sold.

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Gross Loss: Is an excess of cost of goods over Sales.

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SECTION B. PROFIT AND LOSS ACCOUNT:

It is an account which is prepared at the end of trading period of the business in order to determine net profit or net loss of the business.

Net profit: Is an excess of Total income over total Expenses.

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  • Net loss:
    Is an excess of Total expenses over Total income.

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Expenses: are costs or amount of money incurred during operating business activities. Examples of expenses,
communication expenses, General expenses, Transport charge, water bill, Advertising, insurance, carriage outward, postage, stamps, stationery, wages & Salaries, Motor expenses, fuel and power, petrol, Rents and Rates, commission. Light & heating Discount allowed; interest allowed. Bad debts, depreciation

Income/ revenue: is the amount of money a business earns from its normal activities. Examples of income,
commission received, Rent received, Discount received, interest received, dividend etc.

Related Posts:

  1. Topic 1: Introduction to Book-Keeping – Book Keeping Notes Form One New Syllabus
  2. Topic 2: Basic Principles of Book-Keeping – Book Keeping Notes Form One New Syllabus
  3. Topic 3: Application of the Double Entry System – Book Keeping Notes Form One New Syllabus
  4. Topic 3: Recording of Business Transactions – Book Keeping Notes Form One New Syllabus
  5. Topic 5: Ledgers – Book Keeping Notes Form One New Syllabus
  6. Topic 6:  Trial Balance – Book Keeping Notes Form One New Syllabus

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