Question

GIANTS, a sole trader extracted the following trial balance from her books at the close of business on 31" December, 2016: Dr Cr GHC GHC 61,420 7,940 127,245 25,200 2.490 Purchases and sales Inventory 1 January, 2016 Capital 1 January, 2016 Bank overdraft Cash Discounts Returns Carriage outwards Rent and insurance Allowance for doubtful debts Fixtures and fittings Van Accounts receivable and trade payable 140 2,480 3,486 3,210 8,870 62 1,356 630 1,900 5,600 12,418 11,400 Drawings 21,400 Wages and salaries 39,200 General office expenses 319 168,383 168,383 Additional information: (a) Inventory 31" December, 2016 GHC 6,805 (b) Wages and salaries accrued at 31 December, 2016 GHC3,500; Office expenses GHC 16 (c) Rent prepaid 31" December, 2016 GHC 600 (d) Increase in allowance for doubtful debts by GHC 110 to GHC 740 Provide for depreciation as follows: Fixtures and fittings GHC 190 and Van GHC1,400 Required: a) Prepare the income statement for the year ending 31" December, 2016 19 marks b) The preparation of the income statement requires the use of accounting concepts. Explain four of the accounting concepts and where in the income statement they are applicable. 16 marks

Answer 1

GIANTS
Income Statement
For the year Ended 31st December , 2016 (GHC)
	Debit	Credit
Revenues:
Sales Revenue	127,245
Less: Returns	(3,486)
Less: Discounts	(2,480)
Net Sales		121,279
Expenses:
Cost of Goods Sold
Beginning inventory	7,940
Add: Purchase	61,420
Less: Returns	(1,356)
Less: Discounts	(62)
Net Goods Avaialble		67,942
Less: Ending inventory		(6,805)
		61,137
Advertising Expenses
Carriage Outwards		3,210
Rent and Insurance		8,870
Bad Debt Expenses		630
Wages and salaries ($39,200 + $ 3500)		42,700
General Office Expenses ($319 + $ 16)		335
Depreciation Expenses:
On Fixture and Fitting		190
On VAN		1,400
Total Expenses		118,472
Net Income		2,807

Accounting Concepts
i) Accrual Concept - Revenue is recognized when earned, and expenses are recognized when assets are consumed.
Applicability in Income Statement: Revenue and Expenses
ii) Economic entity concept - The transactions of a business are to be kept separate from those of its owners. By doing so, there is no intermingling of personal and business transactions in a company's financial statements.
	Applicability in Income Statement: Drawings is not included in Income Statement
iii) Matching concept - The expenses related to revenue should be recognized in the same period in which the revenue was recognized.
	Applicability in Income Statement: Sales Discount and all other related Expenses
iv) Consistency concept - Once a business chooses to use a specific accounting method, it should continue using it on a go-forward basis. By doing so, financial statements prepared in multiple periods can be reliably compared.
	Applicability in Income Statement: Depreciation Expenses