Accounting chapter 8 (Income statement) Flashcards
Properties of operating as a sole trader?
. he/she is entitled to all the profits that the business makes, but will also be responsible for any losses the business makes.
. Business decisions may be made quicker but also workload have to bare on his own.
. Capital is restricted to the owner where as other types of busniess can recieve capital from others.
When are financial statements prepared?
At the end of each financial year.
How many parts are there to a financial statement and what are they?
It consists of 2 parts, Income statement and a statement of financial position
Define income statment?
A statement prepared for a trading period to show the gross profit and profit for the year.
How many parts does an income statment consist of?
. Trading section
. Profit and loss section
Define a statement of financial position?
A statement of financial position shows the assets and liabilities of a business at a certain date
What is the relationship between financial statements and trial balances?
Financial statements are usually prepared from a trial balance, every item in a trial balance appears once in a set of financial statements.
What is the equation for Net purchases?
Purchases - Purchase return + Carriage inwards - Goods for own use
What is the equation for cost of sales?
Opening inventory + Net Purchases - Closing inventory
What is the equation for Gross profit?
Revenue - Sales return - Cost of sales
What is the equation for Profit of the year / Net profit?
Gross profit + Other income - Other expense
Define service business?
A service business is one which does not buy or sell goods such as an accountant, an insurance company, a travel agency and many more.
How is the income statement of a service business different?
the trading section will not be available as there are no goods being bought or sold. Only the profit and loss section of the income statement is prepared.
How is capital account recorded in financial statements?
. The capital account is not seen in the income statements, as it will appear in the statement of financial position.
. Profit of the year will ADD to the capital amount
. Loss of the year will REDUCE the capital amount
. Drawings of goods that were not recorded in any account have to be reflected in the drawing account and be reduced later in the capital account. (Drawing REDUCE capital account)
