5th Edition

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FINANCIAL STATEMENTS

CHAPTER 7
CLOSING ENTRIES: Pre-requisites
to Financial Statements

 All revenues and expenses accounts are closed and

the balances are transferred to the statement of
profit and loss.

 The assets, liabilities and capital accounts will be

balanced off and transferred to the statement of
financial position.
The closing entries are as follows:
 Revenues
Dr Revenues a/c
Cr Statement of profit and loss

 Expenses
Dr Statement of profit and loss
Cr expenses a/c
STATEMENT OF PROFIT AND LOSS
 To show the performance of a business in terms of
profits or losses for the year: i.e., gross profit/loss
& net profit/loss.

Sales > Cost of sales = Gross profit

Will be added to other revenues

Sales < Cost of sales = Gross loss

Will reduce the revenue of the business.
 Revenues > Expenses = Net profit
will be transferred to the statement of financial
position and added to the capital of the business

Revenues < Expenses = Net loss

will be deducted from the capital of the business

 if the total revenues is more than the operating

expenses, the business will get NET PROFIT.
 If the total revenues is less than operating expenses,
the business will get NET LOSS.
 STATEMENT OF FINANCIAL
POSITION
 To show the financial position of a business in term of its
assets, liabilities and owner’s equity as at certain date.

 Assets of the business are categorized as NCA and CA.

 Liabilities are categorized into NCL and CL.

 Owner’s equity consists of capital at the beginning of the

period and net profit obtained for the period. Any
withdrawals by the owner will be deducted from the amount
to get the capital at the end period.
 FORMAT OF FINANCIAL
STATEMENT

1. Horizontal format

2. Vertical format
HORIZONTAL FORMAT
 ABC Trading
Statement of Profit or Loss for the year ended 31 December 20x2
RM RM
Opening inventory xxx Sales xxx
Purchases xxx (-) Sales return (xxx)
(-) Purchase return (xxx)
xxx
Carriage inwards xxx
Duty on purchase xxx
Insurance on purchase xxx
Cost of goods available for sale xxx
Closing inventory (xxx)
Cost of sales xxx
Gross profit c/d xxx xxx

Operating expenses: Gross profit b/d xxx

Salary and wages xxx Revenues:
Insurance xxx Discount received xxx
Printing and stationery xxx Rent received xxx
Rent expense xxx Commission received xxx
Discount allowed xxx Interest received xxx
Interest expense xxx
Repairs expense xxx
Carriage outwards xxx

Net Profit c/d xxx

xxx xxx
 ABC Trading
Statement of Financial Position as at 31 December 20X2
RM RM
Non-Current Assets: xxx Owner's Equity:
Land and Building xxx Opening capital xxx
Fixtures and fittings xxx (+) Net profit xxx
Office equipment xxx (-) Drawings (xxx)
Machinery xxx Ending capital xxx
Motor vehicles xxx
xxx Non-current Liabilities:
Long term loan xxx
Current Assets:
Closing inventory xxx Current Liabilities:
Account receivable xxx Account payable xxx
Cash at bank xxx Bank Overdraft xxx
Cash in hand xxx xxx
xxx
xxx xxx
VERTICAL FORMAT
 ABC Trading
Statement of Profit or Loss for the year ended 31 December 20X2
RM RM RM
Sales xxx
Less: Sales return (xxx)
Net sales xxx

Less: Cost of sales

Opening inventory xxx
Purchases xxx
Less: Purchases returns (xxx)
xxx
Carriage inwards xxx
Duty on purchase xxx
Insurance on purchases xxx
Cost of goods available for sale xxx
Less: Closing inventory (xxx)
xxx
Gross Profit (loss) xxx

Add: Revenues
Discount received xxx
Rent received xxx
Commission received xxx
Interest received xxx
xxx
Less: Operating expenses
Salary and wages xxx
Insurance xxx
Printing and stationery xxx
Rent expenses xxx
Discount allowed xxx
Interest expense xxx
Repair expense xxx
Carriage outwards xxx
xxx
Net Profit (loss) xxx
 ABC Trading
Statement of Financial Position as at 31 December 20X2
RM RM RM
Cost Acc.Dep Carrying amount
Non-current Assets

Land and building xxx xxx xxx

Fixtures and fittings xxx xxx xxx
Office equipment xxx xxx xxx
Machinery xxx xxx xxx
Motor Vehicles xxx xxx xxx
xxx
Current assets
Closing inventory xxx
Account receivable xxx
Less: Allowance for doubtful debt (xxx) xxx
Cash at bank xxx
Cash in hand xxx
Prepaid expenses xxx
Accrued revenues xxx xxx
xxx
 Continued…
Financed by:
Owner's Equity
Capital as at 1/1/20X2 xxx
Add: Net profit (loss) xxx
Less: Drawings (xxx)
Capital as at 31/12/20X2 xxx

Non Current Liabilities

Long term loan xxx
Mortgages on premises xxx xxx

Current Liabilities
Loan xxx
Bank overdraft xxx
Account payable xxx
Accrued expenses xxx
Revenues received in advance xxx xxx
xxx