Dimensiones que se evalúan

A business is expected to prepare financial statements at the end of the financial year to measure the financial performance of the business. Such statements that are common to a sole trader are statement of profit or loss and statement of financial position.

Statement of Profit or Loss

The statement of profit or loss formerly called shows the trading affairs as well as the income and operating expenses incurred by a business undertaken in order to determine whether profit was made or loss was incurred. The accounts contained in this statement are:

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Inventory: These are goods which are used for running a business. They could be finished goods bought for resale, raw materials for production, or component parts, hence, there are three types of inventory. These are opening inventory, work- in progress inventory and closing inventory Opening inventory are those that are available at the beginning of the accounting year, work – in progress are semi-finished goods and closing inventory are the unsold or unused inventory at the end of the year.

Purchases: These refer to those merchandize that are bought for the purpose of resale. They are usually added opening inventory.

Carriage Inwards: This is the cost incurred in carrying purchased goods from the market to the company warehouse.

Carriage Outwards: These are cost incurred for assisting a customer to deliver the goods bought from us to his warehouse.

Return Outwards: These refer to the total value of goods that are returned to a seller by a company as a result of defects of the goods or that the goods do not meet specification.

Revenue: These refer to the total value of goods sold within a given period of time.

Returns Inward: These are the total value of goods that are returned by a buyer as a result of the problem or otherwise associated with the goods.

Discount: This is a reduction in the monetary value of a product, which is offered by a seller to a buyer. The discount offered by the company is called discount allowed which is an expense to the firm while the discount given to the firm is called discount received which is an income to the business.

Accruals: These are expenses due not yet paid or income due not yet received.

Prepayments: These are expenses paid in advance or income received in advance.

Bad Debts: These refer to the amount of money owned by customers to a business but the tendency of repayment is very low or zero. Bad debt could be as a result of death, insolvency,

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insanity etc, of the customer. Therefore a businessman will quietly write it off from his book of account. This is known as bad debt written off.

In the same way the firm who sells on credit could forecast that some customers may not pay their debts, and therefore make provision for such debt. This is known as provision for bad debt.

It is also an expense to the firm.

Statement of Financial Position

Statement of financial position formerly called the balance sheet is a financial statement, which shows the financial position of a business. In it, all the assets and liabilities of the business are declared including owner‘s equity. The accounts used in the preparation of statement of financial position include the following:

Capital: These are the private resources used in starting a business. When net profit/loss from the statement of profit or loss are added or subtracted and drawings are deducted, the final amount is known as owner‘s equity.

Assets: These are the economic benefits or property owned by the firm. Such assets could be non-current or current assets. Non-current assets are those business properties that are not easily converted into cash and they are used for the generation of income e.g. land/ building, motor van, plant and equipment, furniture, etc. Current assets are those assets of a business that are cash-like. They are called liquid assets because they are easily converted into cash. Examples of current assets of a business are: inventory, cash in hand, cash at bank, receivables or debtors prepayments, etc.

Liabilities: These are the debts or obligations owed by a business. Liability could be current or long-term. Current liabilities are the debts owed by a business for a short period of time e.g payables, creditors, accruals, one-year loan etc while long-term liabilities are those debts that are owed by a firm whose maturity period exceeds one year e.g. mortgage loan.

92 4.0 CONCLUSION

Finance and accounting play a very significant role in the management of an enterprise. The finance and accounting function include sources and application of fund, supervising cash receipts and payments; safeguarding cash receipts; safeguarding documentary and material valuable; ensuring that appropriate books of account are maintained, keeping adequate records of all transactions ; and reporting appropriately and adequately through financial statements to interested parties.

5.0 SUMMARY

You have learnt in this unit about financing, investment, and dividend decisions, the difference between book-keeping and accounting, accounting assumptions and principles, classifications of account, books of account, and financial statements.