Principles of financial statements

Learning Outcomes - Principles and Preparation of Financial Statements

At the end of this unit students will be to

Income statements (trading and profit and loss accounts

  • calculate the gross and net profits or losses based on accounting principles, for a specified period
  • recognise that net profit (or loss) is the increase (or decrease) in the net assets during that period.

Balance sheets

  • recognise that they are statements of balances of assets and liabilities on a specified date
  • recognise and define non-current assets (fixed assets), intangible assets, current assets, current liabilities (creditors: amounts due within 12 months), long-term liabilities (creditors: amounts due after more than one year), working capital, capital employed and capital owned
  • comment on the inter-relationship of balance sheet items.

Preparation of financial statements (final accounts)

Sole traders

  • explain the difference between a trading business and a service business
  • prepare income statements (trading and profit and loss accounts) and balance sheets for trading
    businesses in either horizontal or vertical form
  • prepare income statements (profit and loss accounts) and balance sheets for service businesses in
    either horizontal or vertical form
  • make adjustments for provision for depreciation using the straight line (equal instalment), diminishing (reducing) balance and revaluation methods
  • make adjustments for accrued and prepaid expenses and accrued and prepaid income
  • make adjustments for bad debts and provisions for doubtful debts
  • make adjustments for goods taken by the owner for own use.

Partnerships

  • explain the advantages and disadvantages of forming a partnership
  • outline the importance and contents of a partnership agreement
  • explain the purpose of an appropriation account
  • prepare income statements (trading and profit and loss accounts), appropriation accounts and balance sheets in either horizontal or vertical form
  • show the treatment of interest on partners’ loans, interest on capital, interest on drawings, partners’ salaries and the division of the balance of profit or loss
  • make adjustments to financial statements (final accounts)
  • explain the uses of, and differences between, capital and current accounts
  • draw up partners’ capital and current accounts in ledger account form and as part of a balance sheet presentation.

Limited liability companies

  • understand the meaning of the term limited liability
  • prepare simple appropriation accounts in either horizontal or vertical form
  • understand and distinguish between authorised, called-up, paid-up share capital
  • understand and distinguish between share capital (preference shares and ordinary shares) and loan capital (debentures)
  • understand the capital structure of a limited company comprising preference share capital, ordinary share capital, general reserve and retained profits (profit and loss account)
  • prepare appropriation accounts in either horizontal or vertical format
  • prepare balance sheets in either horizontal or vertical form.

Clubs and societies

  • distinguish between receipts and payments accounts and income and expenditure accounts
  • prepare receipts and payments accounts
  • prepare accounts for revenue-generating activities, e.g. refreshments, subscriptions
  • prepare income and expenditure accounts and balance sheets
  • make adjustments
  • calculate the accumulated fund.

Manufacturing accounts

  • distinguish between direct and indirect costs
  • distinguish between direct material, direct labour, prime cost and factory overheads
  • understand and make adjustments for work in progress
  • calculate factory cost of production
  • prepare manufacturing financial statements: income statements (trading and profit and loss accounts) and balance sheets
  • make adjustments to financial statements (final accounts)

Incomplete records

  • prepare opening and closing statements of affairs
  • calculate net profit or loss from changes in capital over time
  • calculate sales, purchases, gross profit, trade receivables (debtors) and trade payables (creditors) and other figures from incomplete information
  • prepare income statements (trading and profit and loss accounts) and balance sheets
  • make adjustments to financial statements (final accounts)
  • apply the techniques of mark-up, margin and inventory (stock) turnover to arrive at missing figures.

New Youtube Channel - ThinkIGCSE

Hi Everyone, I have launched a new YouTube channel with more than a 100 videos on  Economics and Business Studies, tailored specifically for IGCSE and A Level and IBDP students.

Subscribe now and join us on this learning journey: @thinkIGCSE

Exciting News!

IMPORTANT MESSAGE

Quizzes and worksheets on this website have been developed in Flash format. Flash is no more supported by browsers. Therefore, you might see blank pages on some instances. Install Flash player plugin for Chrome from Chrome Web Store. Click here 

Similarly, for other web browsers you will have to activate the relevant flash player plugins.

JOIN OUR ONLINE COURSES

WHO'S ONLINE

We have 141 guests and no members online

Save
Cookies user preferences
We use cookies to ensure you to get the best experience on our website. If you decline the use of cookies, this website may not function as expected.
Accept all
Decline all
Read more
Analytics
Tools used to analyze the data to measure the effectiveness of a website and to understand how it works.
Google Analytics
Our website uses Google Analytics to understand how you interact with our site and improve your browsing experience. These cookies collect information in an anonymous form, including the number of visitors to the site, where visitors have come from, and the pages they visited. The data helps us analyze trends and user behavior to enhance our website's functionality and content.
Accept
Decline
Marketing
Set of techniques which have for object the commercial strategy and in particular the market study.
Marketing
Our website uses Google marketing cookies to deliver personalized ads and measure the effectiveness of our advertising campaigns. These cookies track your online activity to help us show you relevant ads on Google services and partner websites.
Accept
Decline