Financial Statements – I

Capital and revenue items, the trading and profit and loss account, gross, net and operating profit, the balance sheet and the opening entry.

Key ideas

• Capital expenditure gives benefit for more than a year (a van, installing a machine); revenue expenditure is used up within the year (wages, repairs, rent).
• The trading account takes sales less returns, the stocks, purchases less returns and the direct expenses (wages, carriage inwards, freight, factory rent) and gives the gross profit.
• The profit and loss account takes the gross profit, the indirect expenses (office salaries, advertisement, carriage outwards, bad debts, interest on a loan) and other incomes, and gives the net profit.
• Operating profit leaves out non-operating items such as interest paid on a loan and interest received.
• The balance sheet shows the assets on one side and capital and liabilities on the other, with equal totals.
• The opening entry debits every asset and credits every liability, with capital as the balancing figure.

Remember

Watch out

• Putting carriage outwards in the trading account, or carriage inwards in the profit and loss account.
• Taking purchases returns off sales instead of off purchases.
• Leaving drawings out of the closing capital.

Worked example