Content Standard 2.1

Components of the Income Statement and Statement of Financial Position

Komponen Penyata Pendapatan dan Penyata Kedudukan Kewangan

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Explanation

Content Standard 2.1 introduces the two principal financial statements that form the final product of a business's accounting cycle, namely the Income Statement (Penyata Pendapatan) and the Statement of Financial Position (Penyata Kedudukan Kewangan). At this stage students are not yet preparing full statements; the focus of this standard is on identifying the components contained in each statement. This ability to recognise components is the foundation students need before they can classify accounts and later prepare the statements in the closing chapters. The Income Statement reports the performance of a business, that is whether the business earned a profit or suffered a loss over an accounting period. The Statement of Financial Position reports the financial position (balances) of the business at a particular date, showing what it owns (assets) and the claims on those assets (liabilities and owner's equity).

The Income Statement for a sole proprietorship that trades in goods is divided into two sections. The first is the Trading section, which computes Gross Profit (Untung Kasar). Its components include Sales, Return Inwards (to arrive at Net Sales), Opening Inventory, Purchases, Return Outwards, Carriage Inwards and import duty (grouped as expenses on purchases), and Closing Inventory. Together these form the Cost of Sales. The basic formula is Net Sales minus Cost of Sales equals Gross Profit. The second is the Profit or Loss section, which computes Net Profit or Net Loss. The components here are Gross Profit, plus other Revenue (such as Discount Received, Commission Received, Interest on Fixed Deposit and Rent Received), and minus Expenses (such as Salaries, Rent Paid, Assessment Rates, Insurance, Utilities, Depreciation, Bad Debts and Discount Allowed).

The Statement of Financial Position contains three broad groups of components, namely Assets, Liabilities and Owner's Equity. Assets are divided into Non-current Assets and Current Assets. Non-current Assets are held for long-term use and are not intended for resale, for example Land, Buildings, Motor Vehicles, Fittings, Furniture and Machinery. Current Assets are assets easily converted to cash within one accounting year, for example Closing Inventory, Debtors (Trade Receivables), Bank, Cash, Prepaid Expenses (Belanja Terdahulu) and Accrued Revenue (Hasil Terakru, revenue not yet received).

The second group is Liabilities, the obligations or debts of the business to outside parties. Liabilities are likewise divided into Non-current Liabilities and Current Liabilities. Non-current Liabilities are long-term debts payable in more than one year, for example a Bank Loan and Mortgage. Current Liabilities are debts payable within one year, for example Creditors (Trade Payables), Bank Overdraft, Accrued Expenses (Belanja Terakru, expenses owing) and Revenue Received in Advance (Hasil Terdahulu). The third group is Owner's Equity, the owner's claim on the business. Its components are Capital, plus Net Profit (or minus Net Loss), and minus Drawings (Ambilan).

The two statements are closely linked. The Net Profit or Net Loss calculated in the Income Statement is carried to the Statement of Financial Position and used to adjust Owner's Equity. Closing Inventory appears in two places: it is deducted in calculating Cost of Sales in the Income Statement and listed as a Current Asset in the Statement of Financial Position. A clear grasp of each statement's components therefore lets students place every item correctly and avoid classification errors. Remember that revenue and expenses enter only the Income Statement, while assets, liabilities and equity enter only the Statement of Financial Position.

Worked examples

Identifying Income Statement components (Maju Jaya Enterprise)

The following items are taken from the books of Maju Jaya Enterprise on 31 December 2023. Your task is to identify which items are components of the Income Statement and place them in the correct section.

Trading section: Sales RM85,000; Return Inwards RM2,000; Opening Inventory RM6,000; Purchases RM40,000; Return Outwards RM1,500; Carriage Inwards RM800; Closing Inventory RM7,000. Summary: Net Sales = RM85,000 - RM2,000 = RM83,000. Cost of Sales = RM6,000 + (RM40,000 - RM1,500 + RM800) - RM7,000 = RM38,300. Gross Profit = RM83,000 - RM38,300 = RM44,700.

Profit or Loss section: Revenue (Commission Received RM1,200; Discount Received RM600). Expenses (Salaries RM12,000; Rent Paid RM6,000; Insurance RM1,500; Depreciation of Motor Vehicle RM3,000; Bad Debts RM800). Net Profit = RM44,700 + (RM1,200 + RM600) - (RM12,000 + RM6,000 + RM1,500 + RM3,000 + RM800) = RM23,200.

Identifying Statement of Financial Position components (Maju Jaya Enterprise)

From the same list of balances, the following items belong to the Statement of Financial Position as at 31 December 2023.

Non-current Assets: Motor Vehicle RM30,000; Furniture RM8,000; Fittings RM5,000. Current Assets: Closing Inventory RM7,000; Debtors RM4,500; Bank RM9,000; Cash RM1,000. Total Assets = RM64,500 (Non-current Assets RM43,000 + Current Assets RM21,500).

Owner's Equity: Capital RM40,000 + Net Profit RM23,200 - Drawings RM5,000 = RM58,200. Non-current Liabilities: Bank Loan RM4,000. Current Liabilities: Creditors RM2,300. Total Equity + Liabilities = RM58,200 + RM4,000 + RM2,300 = RM64,500. Both sides balance, proving the items were classified correctly.

Practice

State the two sections of the Income Statement for a sole proprietorship and the key figure computed in each.

Answer: The first is the Trading section, which computes Gross Profit (Net Sales minus Cost of Sales). The second is the Profit or Loss section, which computes Net Profit or Net Loss (Gross Profit plus Revenue minus Expenses).

Classify the following items as Non-current Asset, Current Asset, Non-current Liability, Current Liability or Owner's Equity: Motor Vehicle, Debtors, Creditors, Capital, Closing Inventory, Bank Loan.

Answer: Non-current Asset: Motor Vehicle. Current Asset: Debtors, Closing Inventory. Current Liability: Creditors. Non-current Liability: Bank Loan. Owner's Equity: Capital.

Given: Gross Profit RM30,000; Discount Received RM500; Salaries RM10,000; Rent Paid RM4,000; Depreciation RM2,500. Compute Net Profit and state which statement contains this figure.

Answer: Net Profit = Gross Profit RM30,000 + Revenue RM500 - Expenses (RM10,000 + RM4,000 + RM2,500 = RM16,500) = RM14,000. This Net Profit is computed in the Profit or Loss section of the Income Statement, then carried to the Statement of Financial Position to increase Owner's Equity.

Explain why Closing Inventory appears in both statements and state its location in each.

Answer: Closing Inventory is deducted within the Cost of Sales in the Trading section of the Income Statement so that only the cost of goods actually sold is counted. Closing Inventory is also listed as a Current Asset in the Statement of Financial Position because it is stock still owned by the business at the statement date and can be converted to cash.

Exam tips

Key terms

Income Statement: A statement showing a business's profit or loss for an accounting period through the Trading section and the Profit or Loss section.
Statement of Financial Position: A statement showing assets, liabilities and owner's equity at a particular date.
Non-current Asset: An asset held for long-term use and not for resale, for example buildings and motor vehicles.
Owner's Equity: The owner's interest in the business, being Capital plus Net Profit minus Drawings.

Source: DSKP KSSM Prinsip Perakaunan Tingkatan 4

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