Principles of Finance for the Business

Preparation of income statement for Laolu & Company

Income statement

It is also known as profit and loss account which guides managers to determine that the company is generating profits or losses. Main purpose of its formulating is to analyse that profitability of a firm is high or low (Income statement, 2020). There are various elements which are recorded in it. These are all the expenses such as administration, legal, postage, rent, salary, wages, advertisement etc. Different types of incomes such as commission, interest, discount etc. are also recorded in it. Expenditures are recorded on the debit side of it and receipts are recorded on the credit side of the statement. Income statement for Laolu & company is as follows:

Income Statement as on 31 December 2019 for Laolu & Company

Preparation of balance sheet for Laolu & Company

Balance sheet

It is also known as statement of financial position which is used by internal as well as external stakeholders for the purpose of determining actual performance of business. There are two sides of it which are assets and liabilities. Elements such as equities, creditors, bills payables etc. are considered as liabilities of the company (Ansart and Monvoisin, 2017). Components which are recorded in assets side are plant, machinery, building, cash, bank etc. In order to analyse actual financial position of business it is very important for companies to generate it.Get Assignment Examples?Talk to our Experts! A balance sheet for Laolu & Company is as follows:

Balance Sheet as on 31 December 2019 for Laolu & Company 

Kwaku Ltd is a small start up company which is involved in the manufacturing activities of water coolers. There are various transactions which have taken place during the year. Explanation for their recording is as follows:

Owed amount of 20000 by a customer: This amount will be recorded in profit and loss account and balance sheet. In P & L it will be shows in debit side as it will be received in next year or upcoming years. In balance sheet it will be recorded in assets side as it is income of the company which is being earned but not year received. Therefore, it will be treated as assets of the organisation (Boudrias and Kotkin, 2016).

Newly acquired equipment at 10000: If a company buy a new equipment or any other asset then it is recorded in the asset side of balance sheet. Main reason of it is that if company acquires any property for business execution then it is considered as asset of the organisation. Therefore, the recently purchased equipment of 10000 pounds will be recorded in right side of balance sheet of Kwaku Ltd.

Loan from bank for 25000: If a company is taking credit from any external party such as banks then it will be recorded in the liabilities side because it will be required to be paid after a certain period of time. As Kwaku Ltd took a loan of 25000 pounds form a bank therefore it will be recorded in the balance sheet of the organisation as a liability.

Investment received from venture capitalist: When an organisation acquire funding from external sources then it is recorded in the liabilities side in debts as the amount will be required to paid off after a certain period of time. Another reason for recording it in balance sheet is the interest which will be paid to the investor on yearly basis for the total amount of investment (Ehlers and Packer, 2017).As Kwaku Ltd has received a venture investment from an investor so it will be recorded in liabilities side and added in the debts which are received from external parties.

Salary of inventor: If any employee of a company is receiving compensation for the work then it is considered as an expense for the organisation. As newly appointed inventor of Kwaku Ltd is receiving salary of 70000 pounds from the company so it will be recorded in income statement in the debit side because salaries are treated as expenditures for the company.

Amount due to a supplier: All the payments which are made by an organisation are considered as expenses for the business. Recording of them is based upon their nature if they are of capital nature then the money paid to them will be decreased from total amount. Rest of the expenses are recorded in income statement. The payment made by Kwaku Ltd to the supplier will be recorded in liabilities side of balance sheet and decreased from the total value of creditors  because they are considered as creditors of the organisation (Eshet, 2017).

Credit sales of a customer: Sales made by companies are recorded in trading account but if it is done in the form of credit then it is shown in balance sheet also. As Kwaku Ltd sold goods of 30000 pounds on credit so it will be added to the total sales of organisation in trading account. The value of it will also added to the total receivables of the enterprise.

Interest and charges paid on overdraft: All the payments that are made by an organisation in a specific time period are considered as expenses and recorded in the income statement. The amount of charges and interest which was paid by Kwaku Ltd will be recorded in income statement because it is an expense.

Cost under absorption costing: This technique makes sure that all the costs which have taken place while production of units are being absorbed from the revenues which are generated by selling them (Mosca, 2017). Calculation of it is as follows:

Profit or loss per unit: Total profit or loss / number of total units

= 55000 / 1000

= -55

Cost = total expenses /  total units to be sold

= 30000 + 75000 + 30000 / 1000

= 135000 / 1000

= 135 (absorption cost)

Cost under marginal costing: It is also a costing technique which is mainly focused with the analysis of variable cost. It is used to calculate the cost which may take place due to manufacturing of additional unit (Scholtens, 2017). Calculation of it is as follows:

Profit or loss per unit =  gross margin / total units

= -25000 / 1000

= 25

Cost = Total expenses / number of units

= 30000 + 75000 / 1000

= 105000 / 1000

= 105 (marginal cost)

From the above calculations it has been determined that the organisation will face loss if it will supply water coolers to a new customer in West Africa because marginal as well as absorption costing are showing negative balance and costs for the company. Marginal cost of the organisation for selling coolers in West Africa will be 105 and the absorption cost will be around 135. Order Finance Essay Help Now!

Conclusion

From the above project report it has been concluded that all the organisations should follow all the essential principles of finance so that all the final accounts could be formulated properly. There are various types of financial statements which are generated by an organisation these are income statement and balance sheet. With the help of them actual position of business could be determined. There are various techniques which are used by companies to determine costs. These are absorption and marginal.

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