Sales. Sales mean total sales i.e. cash plus credit sales. If there are any sales returns, these should be deducted from sales. So net sales are credited to trading account. If an asset of the firm has been sold, it should not be included in the sales.
Closing Stock. It is the value of stock lying unsold in the godown or shop on the last date of accounting period. Normally closing stock is given outside the trial balance in that case it is shown on the credit side of trading account. But if it is given inside the trial balance, it is not to be shown on the credit side of trading account but appears only in the balance sheet as asset. Closing stock should be valued at cost or market price whichever is less.
Expenses. All expenses relating to purchase of goods are also debited in the trading account. These include-wages, carriage inwards freight, duty, clearing charges, dock charges, excise duty, Value added tax and import duty etc.
he sales shows us the amount of sales revenue it has in a company, in Domestic Dog Homes is £64,000 as the cost of sales which £4,000, the opening stock which was left unsold the previous year is £32,000, the closing stock which is goods unsold in the last date of accounting period is £5,000 and the expenses such as rent etc is £21,400.
Balance sheet of Domestic Dog Homes
A balance sheet is a statement of the total assets and liabilities of an organisation at a particular date - usually the last date of an accounting period.
The balance sheet is split into two parts:
(1) A statement of fixed assets, current assets and the liabilities (sometimes referred to as "Net Assets")
(2) A statement showing how the Net Assets have been financed, for example through share capital and retained profits.
The Companies Act requires the balance sheet to be included in the published financial accounts of all limited companies. In reality, all other organisations that need to prepare accounting information for external users (e.g. charities, clubs, and partnerships) will also product a balance sheet since it is an important statement of the financial affairs of the organisation.
Definition of Assets:
An asset is any right or thing that is owned by a business. Assets include land, buildings, equipment and anything else a business owns that can be given a value in money terms for the purpose of financial reporting.
Definition of Liabilities:
To acquire its assets, a business may have to obtain money from various sources in addition to its owners (shareholders) or from retained profits. The various amounts of money owed by a business are called its liabilities.
Long-term and Current:
To provide additional information to the user, assets and liabilities are usually classified in the balance sheet as:
- Current: those due to be repaid or converted into cash within 12 months of the balance sheet date;
- Long-term: those due to be repaid or converted into cash more than 12 months after the balance sheet date;
Fixed Assets:
A further classification other than long-term or current is also used for assets. A "fixed asset" is an asset which is intended to be of a permanent nature and which is used by the business to provide the capability to conduct its trade. Examples of "tangible fixed assets" include plant & machinery, land & buildings and motor vehicles. "Intangible fixed assets" may include goodwill, patents, trademarks and brands - although they may only be included if they have been "acquired". Investments in other companies which are intended to be held for the long-term can also be shown under the fixed asset heading.
Definition of Capital:
As well as borrowing from banks and other sources, all companies receive finance from their owners. This money is generally available for the life of the business and is normally only repaid when the company is "wound up". To distinguish between the liabilities owed to third parties and to the business owners, the latter is referred to as the "capital" or "equity capital" of the company.
In addition, undistributed profits are re-invested in company assets (such as stocks, equipment and the bank balance). Although these "retained profits" may be available for distribution to shareholders - and may be paid out as dividends as a future date - they are added to the equity capital of the business in arriving at the total "equity shareholders' funds".
At any time, therefore, the capital of a business is equal to the assets (usually cash) received from the shareholders plus any profits made by the company through trading that remain undistributed
Creditors:
Creditors form part of a business’s liabilities and represent amounts due to third parties. Creditors are analysed in the balance sheet into those due within one year and those due after more than one year. For most businesses, the main creditor is “trade creditors” – amounts owed to providers of goods and services on credit terms to the business.
Current liabilities:
Current liabilities are those short-term liabilities which are intended to be constantly replaced in the normal course of trading activity. Current liabilities typically comprise: trade creditors, accruals and bank overdrafts.
Debtors:
Debtors represent amounts owed to a business by its customers and other third parties. Debtors are shown as part of current assets in the balance sheet.
Drawings:
Assets withdrawn from the business by the owners. These assets are usually cash but can be any asset withdrawn. In company accounts the withdrawal of assets by the owners is either called:
- salaries if it is payment for work done by the owner or
-
Dividends if it is for a share of the profits.
Capital:
Items, usually cash or other assets introduced into the business by the owners. Sometimes referred to as Capital Introduced. For companies this is referred to as share capital and Capital Employed is the term given to the total of:
-
Capital (which comes in two varieties ordinary and preference)
-
capital (which is simply a grand name for long term loans)
-
Bank:
Amounts held in the bank and in cash. Found in the section of the Balance Sheet.
If the amounts are in deficit, then the bank account is said to be an overdraft and will not appear in current assets but will be found in the Current Liabilities section of the balance sheet
Financed by:
The final section of the balance sheet shows the shareholder’ funds because it is the shareholders of a company that at the owners of the net assets of the business. It begins with the amount of capital that was invested in the business at the start of the year to which the net profit for the year (taken from the P/L a/c). If this is a Sole trader’s account you will enter a figure for drawings here. This is the salary he or she will pay themselves for working in the business for the year.
Current Assets:
This is where companies list all of the stuff that can be converted into cash in a short period of time [usually a year or less]. Because these assets are easily turned into cash, they are sometimes referred to as "liquid".
Net Assets:
Is the difference between the total assets and total liabilities.
Working capital:
A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:
Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory).
Also known as "net working capital".
If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.
Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.
Net Assets:
Net assets are disclosed as part of the balance sheet. Net assets equals total assets on the balance sheet less total liabilities.
Net Profit:
less less = net profit.
Sales less cost of sales =
Therefore Net Profit = gross profit less expenses.
In other words Net Profit represents the surplus of sales made over expenditure during the accounting period. If a deficit is made (i.e. if expenditure is greater than sales) then this results in a net loss and not a net profit. It shows the profit made after all the expenses.
Conclusion:
Domestic Dog homes are making profit as it shows in their trading profit and loss account and the balance sheet as well. They have a surplus of £11,600 which shows in the trading profit and loss account in the financial year 2007.
As there expenses are less than the income from sales revenue. The balance sheet also shows us the business is making profit as it shows surplus of £48,000 for the financial year 2007.