BASIC FINANCIAL STATEMENTS

Introduction

The process of constructing books of accounts is often referred to as book keepingBook keeping information summarized in the trial balance is used to produce financial statements of the business. Usually financial statements are drawn on an annual basis but they can be drawn up at any interval if need be.

Financial statements can be presented in two formats:

i. Vertical

ii. Horizontal

However, the vertical format is most commonly used in modern accounting and such it will be the standard we use.

Key Terms

Financial Statements: These are summary statements of results of a business’s activities for an accounting period and balances as at the end of that period. They include the profit and loss account and the balance sheet.

Statement of Comprehensive Income (Profit and Loss Account): A summary statement that shows the results of activities (profit or loss) during the accounting period.

Statement of Financial Position (Balance Sheet): This is a statement of balances of accounts, assets, liabilities and capital as at the end of an accounting period.

Structure of Financial Statements

Financial statements are structured financial presentations of the financial position of an entity as well as the results of its transactions. The main aim of financial statements is to provide information about an entity that is useful to users in making decisions. They provide information about the entity’s:

a) Income and Expenses including gains and losses

b) Assets

c) Liabilities

d) Capital

The trial balance is the bridge between bookkeeping and preparation of financial statements. All the items appearing on the trial balance are used in the financial statements. However, it must be noted that the trading account and the profit and loss account are both ‘accounts’ through which