4) Simple Financial Statements

Question 1

What is the purpose of Financial statements

Answer 1

IS and BS can be analysed to determine the performance, financial position, and liquidity of a business for a period of time.

Question 2

What is the purpose of Income Statement

Answer 2

Income Statement: The income statement lists the various income and expense accounts incurred by the business in the accounting period to calculate the profit or loss made by the business in the accounting period.

Question 3

What is the purpose of Balance Sheet

Answer 3

Balance Sheet (Statement of Financial Position): The purpose of the Balance sheet is to show the financial position of the business by displaying the assets and liabilities as well as the equity to the owner. It shows the cashflows of the business to pay its expenses and liabilities, as well as its liquidity to meet their debts as they fall due.

Question 4

What is the Profit and Loss Account

Answer 4

Is a general ledger account set up so that the total of each income and expense account can be transferred into it.

Question 5

What is the function of closing entries?

Answer 5

• Close off individual income and expense account ready for the next accounting period.
• Calculate the Profit/Loss for the accounting period.
• Transfer balances from temporary account to a permanent account

Question 6

Purpose of Trial Balance

Answer 6

Trial Balance: The trial balance lists all the accounts used by the business in the accounting period, and helps to check that the debits and credits are equal, and list all the account totals, and also to detect any errors in the transposition of ledger totals.