Financial Statements - I

FINANCIAL STATEMENTS - I MEANING OF FINANCIAL STATEMENTS Like a student who eagerly waits for his/her annual examination result, every businessman also eagerly waits to know the result of his business for a particular financial year. The businessman also wants to know the financial position of his business on a particular date. This date is normally the last date of the financial year for which the accounts have been prepared. The statements, prepared to know the result of the business and the financial position of the business, are called financial statements. The statement prepared for ascertain gross profit/loss is called Trading Account. The statement prepared to ascertain the net profit is called Profit and Loss Account. Trading and Profit and Loss Account taken together is called the Income Statement. Statement prepared to know the financial position of the business is called the Balance Sheet or Position Statement. OBJECTIVES OF FINANCIAL STATEMENTS Following are the objectives of preparing financial statements: (i) Ascertain the result of business activities : One of the important objectives of preparing financial statements is to ascertain the Income. Financial statements provide information about the profit earned or loss incurred during a particular accounting period or year. (ii) Ascertain the financial position of business : Balance Sheet provides information about the financial position of business on a particular date. (iii) Correct decision making : Financial statements are helpful in decision making for the business on the basis of the information provided by financial statements, future decisions can be taken correctly. (iv) Judging the performance of management : Financial statements are helpful in judging the performance of management and utilization of resources of a business house. (v) Ascertaining the cash position of business : The cash position indicated by the financial statements helps the business in planning the payment of cash to creditors, suppliers etc. CLASSIFICATION OF FINANCIAL STATEMENTS Financial Statements of a sole trader comprise of the following statements: 1. Income Statement (i) Trading Account and (ii) Profit and loss Account 2. Position Statement or Balance Sheet 1. INCOME STATEMENT : Income statement is prepared to find out the profit or loss of business for a particular accounting year. Income statement is made up of the following accounts: a) Trading Account and b) Profit and loss Account Statements (Without Adjustment) a) Financial Trading Account : Trading Account is prepared to find out the Gross profit earned or Gross loss suffered by the business from business activities during an accounting year. This account is prepared in T-form. Following is the proforma of a Trading Account: Trading Account of M/s XYZ Dr. For the year ending……… Cr. Particulars Amount Particulars Amount To Opening Stock By Sales To Purchases (i) Cash Sales (i) Cash Purchases (ii) Credit Sales (ii) Credit Purchases Total Sales (iii) Total Purchases Less: Sales Returns Less: Purchases Returns Net Sales Net Purchases By Closing Stock Direct Expenses: To Wages By Gross Loss To Freight/ Freight Inward transferred to P & LA/c To Carriage/ Carriage Inward (Balancing fig.) To Fuel & Power To Factory Rent To Gross Profit transferred to P& L A/c (Balancing Figure) Illustration From the following balances extracted from the books of M/s Luxmi & Sons, prepare a Trading Account for the year ended 31st March, 2012. Particulars Opening stock Purchases Sales Purchases Returns Sales Returns Carriage Wages Fuel & Power Closing stock Amount 6,500 45,000 72,000 500 1,500 1,200 4,800 3,200 8,000 Solution: Financial Statements (Without Adjustment) Trading Account of M/s Luxmi & Sons Dr. For the year ended March 31, 2012 INTEXT QUESTIONS 14.1 Particulars Amount To Opening Stock 6,500 To Purchases 45,000 Less: Returns 500 44,500 To Carriage 1,200 To Wages 4,800 To Fuel & Power 3,200 To Gross Profit Transferred to P & L A/c 18,300 (Balancing Figure) 78,500 Particulars By Sales Less: Returns By Closing Stock Cr. Amount 72,000 1,500 70,500 8,000 78,500 Illustration From the following balances extracted from the books of M/s Bhanu Bros, prepare a Trading Account for the year ended 31st March, 2012. Particulars Opening Stock as on 1.4.2011 Purchases Freight Power Custom Duty Sales Closing Stock as on 31st March, 2012 Solution: Dr. Particulars To Opening Stock To Purchases To Freight To Power To Custom Duty Amount 32,000 1,65,000 4,000 6,500 5,500 80,000 30,000 Trading Account of M/s Luxmi & Sons For the year ended March 31, 2012 Amount 32,000 1,65,000 4,000 6,500 5,500 2,13,000 Particulars By Sales By Closing Stock By Gross Loss transferred to P & L A/c (Balancing Figure) Cr. Amount 80,000 30,000 1,03,000 2,13,000 b) Profit and Loss Account : After finding out the gross profit/ gross loss by preparing the Trading Account, Profit and Loss Account is prepared to find out the net profit / net loss of the business during an accounting year. This account is also prepared in T-form. Following is the proforma of a Profit and loss Account. Profit and loss Account of M/s ABC Dr.Financial Statements (Without Adjustment) for the year ended……. Particulars To Gross Loss transferred from Trading A/c To Salaries To Office Rent To Printing & Stationery To Insurance Premium To Interest Paid To Freight outwards To carriage outwards To Discount Allowed to customers To Postage To Telephone Charges To Office Expenses To Sales Expenses To Net Profit Transferred to Capital Account (Balancing Figure) Amount ______ ______ ______ ______ Particulars By Gross profit transferred from Trading A/c By Commission Received By Discount received from creditors By Rent Received By Interest Received By Net Loss transferred to Capital Account (Balancing Figure) Cr. Amount ______ ______ ______ Distinction between Trading Account and Profit and Loss Account : S.No. Trading Account Profit and Loss Account 1. This account shows the gross profit or gross loss for an accounting year. This account shows the net profit or net loss for an accounting year. 2. All direct expenses relating to business are shown on the debit side of this account. All indirect expenses relating to business are shown on the debit side of this account. 3. All direct revenue items are shown on the credit side of this account. All indirect revenue items are shown on the credit side of this account. 4. The balance of this account i.e. gross profit or gross loss is transferred to P&L. A/c. The balance of this account i.e. net profit or net loss is transferred to the capital account of the proprietor . 2. POSITION STATEMENT OR BALANCE SHEET Balance Sheet or Position Statement is prepared to find out the financial position of a business on a particular date. Generally it is prepared on the last date of an accounting year. It is prepared after preparing Trading Account and Profit & Loss Account. Balance Sheet has two sides. Left hand side is known as Liabilities side and right hand side is known as Assets side. The Liabilities side is used for showing liabilities of the business. The term liabilities include ‘Internal Liabilities’ and ‘External Liabilities’ of the business. Internal liabilities means the amount payable by the business(Without to its owner, while external liabilities mean the amount payable to Financial Statements Adjustment) outsiders. Classification of Internal and External Liabilities : . b. c. Internal liabilities Capital External liabilities Creditors Profits of business Bank loan and other loans Reserves of business Expenses payable or due The Assets side is used for showing the assets of the business. The term assets includes fixed assets and current assets of the business. Classification of Assets : Fixed Assets Land and building Current Assets Cash in hand Plant &Machinery Cash at Bank Furniture Stock of goods Motor Vehicles etc. Debtors etc. Objectives of Preparing Balance Sheet : I. Balance sheet is prepared to achieve following objectives: II. To know the financial position of the business. III. To know the position of internal liabilities and external liabilities of the business so that timely arrangement can be made for their payment. IV. To know the position of fixed assets and current assets. V. To plan activities for future on the basis of present financial position. PROFORMA OF BALANCE SHEET : Balance Sheet of M/s ………….. as on…………… Liabilities Amount Assets Bank overdraft Creditors _____ Cash in hand _____ Cash at Bank Loans/Bank Loan Capital _______ Debtors Add : Net Profit _______ Stock Less : Net Loss _______ Investments _____ Furniture Less Drawings _______ Motor Vehicles _______ Plant & Machinery Land & Building Amount _____ _____ _____ _____ _____ _____ _____ _____ _____