SUBJECT: ACCOUNTING GRADE 12 CHAPTER: COMPANIES LESSON: PUBLISHED FINANCIAL STATEMENTS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON 1. Introduction 2. Income Statement 3. Balance sheet INTRODUCTION A company essentially has three different sets of financial statements. The first set is the most comprehensive, and shows all items of income, expenditure, assets and liabilities. This set of financial statements is set up for use by management and other internal users. We will be focusing on this particular set of financial statements. The second set has less information, and is set up for use by shareholders. The third set is set up according to the express requirements of the Companies Act, and displays the least information of the three sets of statements. This is the version of the annual financial statements that should be published. (abridged financial statements) Some users of financial statements: Shareholders Prospective shareholders or investors Banks and other financial institutions Creditors Directors SARS: The Income statement, which gives an indication of the operating activities of the enterprise during the year (result of operations) The Balance sheet, which indicates the enterprises financial position at the end of the year (state of affairs) Page 1
In terms of the recording of transactions of an enterprise, financial statements form the last step in this process. All transactions are recorded as they occur and at the end of the financial year the financial statements are prepared. The following diagram illustrates the cycle followed when recording transactions: Source document Subsidiary journal Ledger Preadjustment Year-end Post Income Balance sheet adjustments adjustment statement INCOME STATEMENT The Income Statement should reflect all incomes and expenses, which apply to the financial period under review. Therefore this statement would only include income and expense accounts. The purpose of preparing this statement is to determine the net profit / loss for the period. The income statement is prepared in keeping with the GAAP principals, especially the matching principal where incomes and expenses for the same period must be reflected. The following table illustrates some income and expense accounts: Incomes Sales Rent income Discount received Interest on fixed deposit / investment Commission income Bad debts recovered Provision for bad debts (decrease) Trading inventory surplus Profit on sale of asset Expenses Cost of sales Rent expense Discount allowed Interest on loan All operating expenses (e.g. telephone, wages etc) Bad debts Provision for bad debts (increase) Trading inventory deficit Loss on sale of asset Depreciation Directors fees Audit fees Format of the company Income Statement: Page 2
LIMITED LIABILITY COMPANIES INCOME STATEMENT TRADING BUSINESS (Continuous inventory system) Name of Company Income statement for the year ended Notes R R Turnover (sales debtors allowances) X Cost of sales () Gross profit Other operating income (Incomes as illustrated in the table above, excluding interest) X X X Gross operating income Xx (Operating expenses as illustrated in the table above, (x) excluding interest) Operating profit / (loss) Xx Interest income 1 Xx Profit (loss) before interest expense Xx Interest expense 2 (xx) Profit / (loss) before tax X Taxation () Net profit / (loss) after tax for the year / period 9 Xx THE BALANCE SHEET The balance sheet should include all assets, liabilities and equity information, thus reflecting the financial status of the enterprise as at a particular date. The following are among the items included in the balance sheet: Assets Fixed assets Land & Buildings Vehicles Equipment Financial assets Fixed deposits > than 12 months Investments Current assets Inventory Receivables Cash on hand and at the bank (includes fixed deposits < than 12 months) Equity and Liabilities Shareholders equity Ordinary share capital Ordinary share premium Retained income Non current liabilities Mortgage loans > than 12 months Current liabilities Payables Bank overdraft Short term loans i.e. loans < than 12 months Distinctive features in the format of the Balance sheet of a company and the notes to the financial statements: Page 3
COMPANIES BALANCE SHEET TRADING BUSINESS (Continuous inventory system) Name of company BALANCE SHEET AT Notes R R ASSETS (This section is the same as in a sole proprietor) Total assets xx EQUITY AND LIABILITIES Equityl and reserves xx Ordinary share capital / equity 7 x Share premium 8 x Retained income 9 x Non-current liabilities xx Mortgage bond (> 12 months) Current liabilities xx Trade and other payables (creditors) 10 x Bank overdraft (if any) x Short term loans (loans payable within 12 months) x Total equity and liabilities xx Note: This is not the full balance sheet. It only illustrates the distinctive features of a company balance sheet. Pay special attention to the Equity and reserves section COMPANIES NOTES TO THE FINANCIAL STATEMENTS TRADING BUSINESS (Continuous inventory system) 5. Trade and other receivables (debtors) Trade debtors Provision for bad debts (new amount calculated) Net trade debtors Prepaid expenses Accrued income Insurance claim Deposit for water and electricity *South African Revenue Services: Income tax (if SARS has been overpaid) *Compare the SARS: Income tax amount in the trial balance to the tax for the year as reflected in the adjustments. If the amount in the trial balance is higher than the tax for Page 4
the year, then the difference between the two amounts will appear as above. 7. Ordinary Share capital AUTHORISED x ordinary shares of Rx each ISSUED x shares issued at Rx on the last day of the previous year x shares at Rx each issued during the financial year x shares at Rx on closing date State number of shares and the par value. xx x x x 8. Share premium Balance on the last date of the previous year x shares issued during the financial year at a premium of x cents Balance on the last day of the current year x State the number of shares issued at a premium and the premium amount. 9. Accumulated profits / Retained Income Balance on the last day of previous year Net profit (loss) after tax for the year / period Ordinary dividends Paid (interim) Recommended (final) Balance on the last day of the current year () (xx) (xx) x The amount for the recommended or the final dividend will always be the same as the balance of the shareholders for dividend account Page 5
10. Trade and other payables (creditors) Trade creditors Accrued expenses Income received in advance Creditors for salaries (net salaries) Pension fund (deduction + contribution) Medical fund (deduction + contribution) Shareholders for dividends (amount of final dividend) South African Revenue Services - *Income tax (if an amount is still owed to SARS) - PAYE - Vat Control *Compare the SARS: Income tax amount in the trial balance to the tax for the year as reflected in the adjustments. If the amount in the trial balance is less than the tax for the year, then the difference between the two amounts will appear as above. Note: These are not all the notes to the financial statements, but only those that are different in a company. The information in brackets is used to show the amounts that make up a particular item. EXERCISE Use the information provided to prepare: The Income statement of Bafana Limited as at 28 February 2009 The Balance sheet as at 28 February 2009. The relevant notes the financial statements. Information: Bafana Ltd has an authorised share capital of 400 000 ordinary shares of R2 each. Their financial year ends on the last day of February. The following pre-adjustment trial balance appeared in the books of Bafana Ltd on 28 February 2009: Pre-adjustment trial balance of Bafana Ltd on 28 February 2009 Fol. Debit Credit Balance sheet section Ordinary share capital B1 720 000 Share premium B2 60 000 Accumulated profits B3 57 360 Page 6
Land and buildings B4 640 000 Vehicles B5 248 000 Accumulated depreciation: vehicles B6 34 400 Trading inventory (stock) B7 94 400 Debtors control B8 73 600 Provision for bad debts B9 2 480 Bank B10 252 800 SA Revenue Service (income tax) B11 147 280 Creditors control B12 65 600 Mortgage loan B13 100 000 Nominal accounts section Sales N1 1 454 804 Cost of sales N2 927 200 Bad debts N3 5 044 Discount received N4 3 480 Discount allowed N5 3 720 Rent income N6 96 000 Loss on sale of vehicle N7 2 760 Bad debts recovered N8 1 640 Interest on mortgage loan N9 9 600 Debtors allowances N10 15 200 Insurance N11 5 360 Telephone N12 7 600 Water and electricity N13 11 200 Salaries and wages N14 112 000 Ordinary share dividends N15 40 000 Adjustments and additional information: 2 595 764 2 595 764 1. G. Themba, a debtor who owed R4 800, has been declared insolvent. The enterprise received 50c in the rand from her insolvent estate and this was recorded. Write the rest off as irrecoverable. 2. The provision for bad debts must be maintained at 3% of good book debtors. 3. Insurance includes an annual premium of R2 400 that was paid on 30 April 2008. 4. Part of the building is let at R9 600 per month. Make provision for the outstanding rent. 5. According to a physical stocktaking, trading inventory on 28 February 2009 is Page 7
R91 600. 6. The water and electricity account for February 2009 has not yet been paid, R1 024. 7. Provide for depreciation on vehicles at 20% per annum on the diminishing balance method. 8. The mortgage loan is redeemable in equal annual instalments of R20 000 on 31 August each year. Interest accrues at 16% per annum. 9. During the year ended 28 February 2009 and additional 60 000 ordinary shares were issued at a premium of 50c per share. This has been recorded. 10. The income tax for the accounting period amounts to R180 000. 11. A dividend of 20c per share was declared on 28 February 2009. Page 8
Page 9