2.17.2. Statement of cash flows (statement of resources and
application)
Business requires substantial cash for operations expansion. Cash
comes primary from four sources, that is,
Owner's investments,
Loan or borrowing,
Earnings,
And selling of non cash assets.E.g.sale of cars.
The objective of the statement of cash flow is to communicate to
decision makers' information about the inflow and outflows of cash.
Cash resources inflows)...cash use s(outflows)= Net change in
cash.
Notice that the heading is dated the same as the income statement
because it covers a period of time.
2.17.3. Trading, Profit and Loss account (income
statement)
The profit and loss account starts with the credit from the
trading accounts in respects of gross profit(or debit if there is gross
loss).
There after, all those expenses or losses, which have not been
debited to the trading accounts, are debited to the profit and loss accounts.
If there is any income besides the gross profit, it will also be transferred to
the credit of profit and loss account.
A fundamental principle for preparing the trading, profit and
loss account, is the expenses and incomes for the full trading period, but only
for the trading period, are taken to the profit and loss account (trading
accounts). This means that, if any exspenses has been incurred but not yet paid
for, a liability for unpaid amount must be credited before the accounts can be
said to show the true picture. All the expenses accounts should be properly
adjusted. This flows from the accrual concept. It is common practice, e.g. to
pay salaries on the first day of the next
month. Salaries on March are generally paid in April if accounts
are being made up to 31st March. Salaries outstanding account is
liability and will appear in the balance sheet.
The above is true for all expenses, whichever expense relating
to the trading period has not yet been paid. Must be adjusted to show its
correct position by means of an entity debiting the expense accounts and
crediting expense outstanding accounts. 15
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