Introduction to Financial Statements

Financial statements are the end product of the accounting cycle. They provide a summary of a business's performance and financial health for the year.

Businesses prepare financial statements to:

Understand the performance of a business(By Profit or loss amount)
Evaluate financial position
Provide information to owners, investors and relevent Government offices
Help in decision making

1. The Income Statement

Formerly known as the Trading and Profit & Loss Account, this statement calculates the profit or loss made during a specific period.

Trading Account: Calculates Gross Profit (Revenue - Cost of Sales).
Profit & Loss: Calculates Profit for the Year (Gross Profit + Other Income - Expenses).

2. Statement of Financial Position (SOFP)

This statement shows the financial position of a business on a specific date. It lists Assets, Liabilities, and Equity based on the Accounting Equation:

Assets = Liabilities + Owner's Equity

In the Cambridge syllabus, the SOFP is usually presented in a vertical format, separating Non-Current and Current items.

Income Statement for the Year Ended 31 December 2025
Revenue
50,000

Less: Cost of Sales
(30,000)

Gross Profit
20,000

Add: Other Income
2,000

Commission Received
500

Discount Received
300

Less: Expenses


Rent Expense
3,000

Wages and Salaries
4,000

Electricity Expense
1,000

Insurance Expense
500

Profit for the Year
14,300

Practice Question

Prepare the Income Statement using the following information:

Revenue = 80,000
Cost of Sales = 50,000
Other Income = 2,000
Expenses = 18,000
Key: Profit = 14,000

Quick Check

1. Which of the following is found in the Trading Account section?

A. Rent expense
B. Inventory at start
C. Bank loan

2. If Assets are $50,000 and Liabilities are $20,000, what is the Equity?

A. $70,000
B. $30,000
C. $50,000

Click here to reveal correct answers

1: B (Opening inventory is part of the Cost of Sales calculation).

2: B (Equity = Assets - Liabilities: $50,000 - $20,000 = $30,000).

Statement of Financial Position as at 31 December 2025
Non-Current Assets


Equipment
25,000

Motor Vehicles
15,000

Total Non-Current Assets
40,000

Current Assets


Inventory
8,000

Trade Receivables
6,000

Cash at Bank
4,000

Total Current Assets
18,000

Total Assets
58,000


Capital


Opening Capital
35,000

Add: Profit for the Year
14,300

Less: Drawings
(3,300)

Closing Capital
46,000

Non-Current Liabilities


Bank Loan
6,000

Current Liabilities


Trade Payables
4,000

Accrued Expenses
2,000

Total Equity and Liabilities
58,000

Practice Question

Prepare the Statement of Financial Position using the following information:

Equipment = 30,000
Inventory = 10,000
Trade Receivables = 7,000
Cash = 3,000
Capital = 40,000
Bank Loan = 5,000
Trade Payables = 5,000

Check: Total Assets = 50,000