The Two Main Financial Statements
Financial statements are reports that summarise the performance and financial position of a business at the end of an accounting period. The two main ones are the trading and profit & loss account and the statement of financial position.
Trading and Profit & Loss Account
The trading account computes gross profit, which is sales less the cost of goods sold. The profit & loss account then subtracts expenses and adds other income to give net profit.
Key idea
Gross profit = Sales − Cost of goods sold
Cost of goods sold = Opening inventory + Purchases − Closing inventory
Net profit = Gross profit + Other income − Expenses
Example
Mr Rahim's shop: Sales RM50,000; opening inventory RM5,000; purchases RM25,000; closing inventory RM8,000; expenses RM12,000.
Cost of goods sold = 5,000 + 25,000 − 8,000 = RM22,000.
Gross profit = 50,000 − 22,000 = RM28,000.
Net profit = 28,000 − 12,000 = RM16,000.
Statement of Financial Position
The statement of financial position shows assets, liabilities and owner's equity at a particular date. It is based on the accounting equation: Assets = Liabilities + Owner's equity. The profit & loss account is prepared for a period, while the statement of financial position is prepared as at a date.
Uses of Financial Statements
Financial statements help the owner see whether the business made a profit or loss and judge the strength of its assets. Banks and creditors study them before lending, while LHDN uses them to compute tax. The two statements are linked: the net profit computed in the profit & loss account is transferred to owner's equity in the statement of financial position, which is what makes that statement balance.
Remember
Gross profit first, then net profit. The statement of financial position must balance: Assets = Liabilities + Equity.