Financial statements are the statements that are prepared at the end of the accounting period, which is generally one year. These include Income Statement i.e. Trading and Profit & Loss Account and Position statement i.e. Balance Sheet
Following are the objectives of preparing financial statements: –
- Ascertaining the results of business operations : Every businessman wants to know the results of the business operations of his enterprise during a particular period in terms of profits earned or losses incurred. Income statement serves this purpose.
- Ascertaining the financial position : Financial statements show the financial position of the business concern on a particular date which is generally the last date of the accounting period. Position statement i.e. Balance Sheet is prepared for this purpose.
- Source of information : Financial statements constitute an important source of information regarding finance of a business unit which helps the finance manager to plan the financial activities of the business and making proper utilisation of the funds.
- Helps in managerial decision making : The Manager can make comparative study of the profitability of the concern by comparing the results of the current year with the results of the previous years and make his/her managerial decisions accordingly.
- An index of solvency of the concern : Financial statements also show the short term as well as long term solvency of the concern. This helps the business enterprise in borrowing money from bank and other financial institutions and/or buying goods on credit.
Trading Account is prepared to ascertain the results of the trading activities of the business enterprise. It shows whether the selling of goods purchased or manufactured has earned profit or incurred loss for the business unit. Cost of goods sold is subtracted from the net sales of the business of that accounting year. In case the total sales value exceeds the cost of goods sold, the difference is called Gross Profit. On the other hand, if the cost of goods sold exceeds the total net sales, the difference is Gross Loss.
All accounts related to cost of goods sold such as opening stock, net purchases i.e. purchase less returns outward, direct expenses such as wages, carriage inward etc. and closing stock with net sales (i.e. Sales minus Sales returns) are posted to the Trading Account. Then this account is balanced. Credit balance shows the gross profit and debit balance shows the gross loss.
Cost of goods sold and gross profit
A business enterprise either purchases goods or manufactures goods to sell in the market. Cost of goods sold is computed to know the profit earned (Gross Profit) or loss incurred (Gross Loss) from the trading activities of a business unit for a particular period.
Cost of goods sold = Opening stock + Net purchases + All direct expenses – Closing stock Gross Profit = Net sales – Cost of goods sold
- Calculate the cost of goods sold from the following information : `
- Opening stock 10000
- Closing stock 8000
- Purchases 80000
- Carriage on purchases
- 2000 Wages 6600
Answer:- COGS is 90600
- Calculate cost of goods sold and gross profit from the following information.
- Sales 62500
- Sales Returns 500
- Opening Stock 6400
- Purchases 32000
- Direct Expenses 4200
- Closing Stock 7200
- The ledger balances extracted at the close of a trading year on 31st March, 2014 are given as follows
Opening stock 12,000
Purchase Returns 2,000
Carriage Inward 800
Closing stock 13,500
Pass necessary journal entries in the journal And Prepare Trading Accounts.
4.Following balances have been extracted from the ledger of Rohit & Sons at the close of the year 2014.
Stock (1.1.2014) 21,000
Purchases Returns 8,000
Sales Returns 12,000
Factory Power 12,000
Stock (31.12.2014) 26,500
Prepare Trading Account