Page 143 - Book-keeping for Secondary Schools Student’s Book Form One

Basic financial statements

Terms used in an income statement The complete equation of net purchases
Terms used in an income statement are is stated as net purchases is equal to
explained as follows: purchases less purchases returns.

Net sales
The figure of net sales is made by two Because of the objective of the process,
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aspects which are sales and sales returns. that is, calculation of the cost of goods
The sales figure is the credit balance sold, another item considered as part
transferred from the sales account in the of such cost is the carriage inwards
general ledger. It is the total of all sales costs. These are costs of transferring or
(both credit and cash) made during the transporting the purchased goods from
period under consideration. Sales returns where they were procured to the premises
are those goods that were previously sold of the enterprise. In simple terms, the
to a customer but were later returned due to cost of goods purchased is the total of
different reasons. Therefore, the net sales the cost paid to purchase such goods plus
is calculated by taking sales less the sales the transportation cost of bringing those
returns which is also known as returns goods to the enterprise's premises. For
inwards. example, the supplier sold goods for TZS

Net purchases 100,000 and TZS 10,000 is incurred by
The figure for net purchases is obtained the buyer to transport such goods from the
after taking into consideration several supplier’s premises to his or her premises.
aspects. The first aspect is the debit In this case, the cost of such goods, is not
balance found in the account of purchases only TZS 100,000 but is TZS 110,000
itself. This figure is the total purchases (TZS (100,000 +10,000)).
(cash and credit) done in the whole
accounting period. Opening inventory and closing inventory
An opening inventory is the inventory of
The second component included in the goods held by the entity at the beginning
calculation of the net purchases figure is of the accounting period. On the other
the purchases returns or returns outwards. hand, a closing inventory is the inventory
Purchases returns refer to those goods
which were previously purchased by of goods held by the entity at the end of the
the entity but were later returned to the accounting period. For instance, suppose
supplier due to several reasons. It should the accounting period of the enterprise starts
st
st
be noted that the figure for purchases on 1 January and ends on 31 December.
shows the total amount (credit and cash) The opening inventory of such an enterprise
of purchases made without deducting would be considered as the inventory held
st
those goods that were returned to the by that enterprise on 1 January, while the
supplier. Therefore, to determine at a net closing inventory would be considered
purchases figure, purchases returns must as the inventory held by that enterprise
st
be deducted from the purchases figure. on 31 December. Similarly, the closing
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