IntroductionIntroduction• What are Financial Statements?What are Financial Statements? Financial statements are those statements which Financial statements are those statements which

provide information about the profitability & the provide information about the profitability & the financial position of a business.financial position of a business.

The term ‘Financial Statements’ includes two The term ‘Financial Statements’ includes two statements which are as under:statements which are as under:Income Statement i.e. Trading & Profit & Loss A/C.Income Statement i.e. Trading & Profit & Loss A/C.Financial Position i.e. Balance Sheet.Financial Position i.e. Balance Sheet.

So, financial statements provide a summary of the So, financial statements provide a summary of the accounts of a business enterprise.accounts of a business enterprise.

objectivesobjectives The main objectives of preparing a trial The main objectives of preparing a trial

balance are:balance are:

• To prepare a true & fair view of the To prepare a true & fair view of the financial performance (i.e. profit/loss) & financial performance (i.e. profit/loss) & position (i.e. assets/liabilities) of the position (i.e. assets/liabilities) of the business.business.

• To communicate the meaningful To communicate the meaningful information to different stakeholders in information to different stakeholders in the business so that they can make the business so that they can make informed decisions.informed decisions.

Information provided by FINANCIAL Information provided by FINANCIAL STATEMENTS is used by the management, STATEMENTS is used by the management, investors, creditors, employees, government investors, creditors, employees, government etc. The utility of financial statements to etc. The utility of financial statements to different parties are:different parties are:

ManagementManagement InvestorsInvestors Short-term CreditorsShort-term Creditors Long-term CreditorsLong-term Creditors Employees and Trade UnionsEmployees and Trade Unions GovernmentGovernment Taxation AuthoritiesTaxation Authorities Other UsersOther Users

From Trial Balance. Final Accounts From Trial Balance. Final Accounts include the preparation of :include the preparation of :

1) Trading and Profit & Loss account and1) Trading and Profit & Loss account and

2) Balance Sheet 2) Balance Sheet

as these two statements are prepared as these two statements are prepared to give the final results of the business, to give the final results of the business, both of these are collectively called as both of these are collectively called as final accounts. Accounting cycle finally final accounts. Accounting cycle finally ends with these statements as shown ends with these statements as shown in next slide:in next slide:

Entry in the books of Original Entry

(ORIGINAL RECORD)

Posting in the concernedLedger account

(CLASSIFICATION)

Preparation of Trial Balance

(CHECKING THE ACCURACY)

Balancing of Real & Personal accounts

Preparation of final accounts(summary)

ACCOUNTING CYCLETRANSACTIONS

Types of Financial Types of Financial StatementStatement

Final accounts or financial Final accounts or financial statements can be divided in two statements can be divided in two parts:-parts:-

1)1) Trading and Profit & Loss AccountTrading and Profit & Loss Account

2)2) Balance Sheet Balance Sheet

Trading AccountTrading Account Trading account is prepared by trading Trading account is prepared by trading

concerns i.e., concerns which purchase and concerns i.e., concerns which purchase and sell finished goods, to know the gross profit sell finished goods, to know the gross profit or gross loss incurred by them from buying or gross loss incurred by them from buying and selling of goods during a particular and selling of goods during a particular period of time. Gross profit or gross loss is period of time. Gross profit or gross loss is the difference between the cost of goods the difference between the cost of goods sold and the proceeds of their sale. If the sold and the proceeds of their sale. If the sale proceeds exceed the cost of goods sale proceeds exceed the cost of goods sold , gross profit is made. Otherwise,gross sold , gross profit is made. Otherwise,gross loss is made. loss is made.

1. It provides information about Gross Profit and Gross Loss

2. It provides information about the direct expenses

3. Comparison of closing stock with those of the previous years.

4. It provides safety against possible losses

:- Account.

1. Purchases Returns Account is closed by transferring its balance to Purchases Account.

2. The Sales Returns Account is closed by transferring its balance to the Sales Account.

3. Closing Entry for those accounts which are to be transferred to the Dr. side of the Trading Account.

4. Closing Entry for those accounts which are to be transferred to the Cr. side of the Trading Account.

5. The credit side of the Trading Account exceeds the debit, the difference will be Gross Profit. The Gross profit will be transferred to the credit of a newly opened account called Profit and Loss Account.

6. The debit side of the Trading Account exceeds the credit, the difference will be Gross Loss. It will be transferred to the debit of P & l a/c.

Ascertainment of Cost of Goods Ascertainment of Cost of Goods SoldSold

Opening StockOpening Stock ……….……….Add: PurchasesAdd: Purchases …….…….Less: Purchase ReturnLess: Purchase Return ……. ……………. ………

Goods Available for SalesGoods Available for Sales……….……….

Add: Direct ExpensesAdd: Direct Expenses ……….……….

Less: Closing StockLess: Closing Stock……….……….

Cost of Goods Sold Cost of Goods Sold ……….……….

Specimen Proforma of Trading Specimen Proforma of Trading AccountAccount

Dr Trading Account of …….. For the year ending……... CrParticulars

To Opening Stock

To Purchases

Less: Returns

To Direct Expenses:

Carriage Inward

Wages

Wages & salaries

Fuel & power

Coal, water & gas

Octroi

Amt. Particulars

By Sales

Less: Returns

By Closing Stock

By Gross Loss c/d*

Amt.

Import Duty

Custom Duty

Excise Duty

Consumable Store

Factory Rent, Rates,

and Taxes

Foreman/ Works Manager’s

Salary

Royalty on manufactured

goods

To Gross Profit c/d*

Profit and Loss account shows the overall result of business operations i.e., the net profit earned or net loss incurred during an accounting period.

IMPORTANCE OF IT ARE AS FOLLOWS:-To ascertain the Net profit or Net lossComparison with the previous year’s profitsControl on expensesHelpful in the preparation of Balance Sheet

For the preparation of Profit and Loss Account the items written in the Debit Side are Gross Loss, Office and Administrative Expenses, Selling and Distribution Expenses, Miscellaneous Expenses.For the preparation of Profit and Loss Account the items written in the Credit Side are Gross Loss, Other Income and Gains.

1.The amount of expense and losses are transferred to the debit Side of Profit and loss account.

2.The amount of income and gains are transferred to the credit Side of Profit and loss account.

PROFIT AND LOSS ACCOUNT (for the period ending on xxx)

Particulars Amount

Particulars Amount

Dr. Cr.

3. For the transfer of the credit balance of Profit and Loss a/c are known to be net profit.

4. For the transfer of the debit balance of Profit and Loss a/c are known to be net loss.

Proforma of Profit & Loss Proforma of Profit & Loss AccountAccount

ParticularsParticulars

To Gross Loss b/dTo Gross Loss b/d

To Establishment To Establishment ChargesCharges

To Administrative To Administrative ChargesCharges

To Selling & To Selling & Distribution Distribution expensesexpenses

To Net ProfitTo Net Profit

(transferred to (transferred to Capital Account)Capital Account)

AmtAmt ParticularsParticulars

By Gross Profit b/dBy Gross Profit b/d

By other expensesBy other expenses

By Net Loss By Net Loss

(transferred to (transferred to capital account)capital account)

AmAmtt

Operating Profit:-It is the profit earned through normal operating activities of the business. They include office and administrative expenses and selling and distribution expenses,etc.Operating profit=Gross profit-Operating expenses

Net Profit:-It means the excess of all revenues over all expenses and losses of a business enterprise. They include interest on loan,charities and donations,etc.Net profit=Operating profit - Operating expenses + non operating income

Balance SheetBalance Sheet Balance Sheet is a component of financial Balance Sheet is a component of financial

statements which shows balances of statements which shows balances of capital, liabilities & assets. All nominal capital, liabilities & assets. All nominal accounts are closed by transferring these accounts are closed by transferring these to Trading & Profit & Loss Account. Only to Trading & Profit & Loss Account. Only personal & real accounts are left. personal & real accounts are left.

Balance Sheet is the final phase in Balance Sheet is the final phase in accounting cycle. It is a ‘mirror’ which accounting cycle. It is a ‘mirror’ which reflects the true position of the assets & reflects the true position of the assets & liabities of the business on a particular liabities of the business on a particular date. date.

“ “A statement of financial position of A statement of financial position of economic unit disclosing as at a given economic unit disclosing as at a given moment of time its assets, liabilities & moment of time its assets, liabilities & ownership equities. Eric L.kohler ownership equities. Eric L.kohler

•AssetsAssets• Fixed AssetsFixed Assets

• Current AssetsCurrent Assets

• Liquid Assets Liquid Assets

• Fictious or Nominal Fictious or Nominal AssetsAssets

• Wasting AssetsWasting Assets

• Tangible and Tangible and Intangible AssetsIntangible Assets

•LiabilitiesLiabilities• Fixed or Long term Fixed or Long term

LiabilitiesLiabilities

• Current or Short term Current or Short term LiabilitiesLiabilities

• Contingent LiabilitiesContingent Liabilities

Balance Sheet as on ……………………Liabilities Liabilities

Capital Capital

Add: Net ProfitAdd: Net Profit

Less: DrawingsLess: Drawings

Fixed Liabilities:Fixed Liabilities:

Long term loanLong term loan

Public depositsPublic deposits

Current Current Liabilities:Liabilities:

Short Term Short Term LoansLoans

Trade CreditorsTrade Creditors

Bank OverdraftBank Overdraft

AmtAmt Assets Assets

Fixed Assets:Fixed Assets:

GoodwillGoodwill

Land and BuildingsLand and Buildings

Plant & Machinery Plant & Machinery

Motor Vehicles Motor Vehicles

FurnitureFurniture

Patents & Trade Patents & Trade Marks Marks

Live StockLive Stock

Loose ToolsLoose Tools

InvestmentsInvestments

Amt Amt

Bill PayableBill Payable

OutstandinOutstanding Expensesg Expenses

Current Current Assets:Assets:

Closing StockClosing Stock

Prepaid Prepaid ExpensesExpenses

Accrued Accrued IncomeIncome

DebtorsDebtors

Bill Bill ReceivableReceivable

Cash at Bank Cash at Bank

Cash in handCash in hand

The assets and liabilities shown in the balance sheet are properly grouped The assets and liabilities shown in the balance sheet are properly grouped and presented in a particular order . The term “grouping” means showing and presented in a particular order . The term “grouping” means showing the items of similar nature under a common heading.the items of similar nature under a common heading.

““Marshalling” is the arrangement of various assets and liabilities in a Marshalling” is the arrangement of various assets and liabilities in a proper order . it can be done in any of the following two ways:-proper order . it can be done in any of the following two ways:-

1.1.In the Order of Liquidity: In the Order of Liquidity: According to this method , an asset which is most easily convertible into According to this method , an asset which is most easily convertible into cash such as cash in hand is written first and then will follow those assets cash such as cash in hand is written first and then will follow those assets which are comparatively less easily convertible , so that the least liquid which are comparatively less easily convertible , so that the least liquid asset such as goodwill , is shown last.asset such as goodwill , is shown last.

In the same way , those liabilities which are to be paid at the earliest will be In the same way , those liabilities which are to be paid at the earliest will be written first . In other words , current liabilities are written first of all , then written first . In other words , current liabilities are written first of all , then fixed or long-term liabilities and lastly , the proprietor’s capital.fixed or long-term liabilities and lastly , the proprietor’s capital.

2.2.In the Order of Permanence: In the Order of Permanence: This method is exactly the reverse of the first method discussed above. This method is exactly the reverse of the first method discussed above. Assets which are most difficult to be converted into cash such as Goodwill Assets which are most difficult to be converted into cash such as Goodwill are written first and the assets which are most liquid such as Cash in hand are written first and the assets which are most liquid such as Cash in hand are written last . Similarly, those liabilities which are to be paid last, will be are written last . Similarly, those liabilities which are to be paid last, will be written first . In other words , the proprietor’s capital is written first of all, written first . In other words , the proprietor’s capital is written first of all, then fixed or long term liabilities and lastly , the current liabilities.then fixed or long term liabilities and lastly , the current liabilities.

GROUPING AND MARSHALLING OF ASSETS AND LIABILITIES

DepreciationDepreciation refers  refers to two very different to two very different but related concepts:but related concepts:

1) the decrease in value 1) the decrease in value of assets (fair of assets (fair value depreciation), and value depreciation), and

2) the allocation of the 2) the allocation of the cost of assets to periods cost of assets to periods in which the assets are in which the assets are used (depreciation with used (depreciation with the matching principle).the matching principle).

In determining the profits In determining the profits (net income) from an (net income) from an activity, the receipts from activity, the receipts from the activity must be the activity must be reduced by appropriate reduced by appropriate costs. One such cost is the costs. One such cost is the cost of assets used but not cost of assets used but not currently consumed in the currently consumed in the activity.activity. Such costs must Such costs must be allocated to the period be allocated to the period of use. Depreciation is any of use. Depreciation is any method of allocating such method of allocating such net cost to those periods net cost to those periods expected to benefit from expected to benefit from use of the asset. The asset use of the asset. The asset is referred to as a is referred to as a depreciable asset. depreciable asset. Depreciation is a method Depreciation is a method of allocation, not valuation.of allocation, not valuation.

   The The straight-line methodstraight-line method is the most  is the most straightforward method of Asset Value straightforward method of Asset Value Depreciation. But:Depreciation. But:

      1)   Not all equipment deteriorates equally e.g. a 1)   Not all equipment deteriorates equally e.g. a car, over its useful life.car, over its useful life.

      2) Methods based on actual usage: total life are 2) Methods based on actual usage: total life are too cumbersome to be practicabletoo cumbersome to be practicable

• Written down value, applicable to machines that Written down value, applicable to machines that have high rates of depreciation in the initial year or have high rates of depreciation in the initial year or two, and later taper it e.g. a car, is a usable method.two, and later taper it e.g. a car, is a usable method.

• Under this method, depreciation is charged at a Under this method, depreciation is charged at a fixed rate every year, on the reducing balance. A fixed rate every year, on the reducing balance. A certain percentage is applied to the previous year's certain percentage is applied to the previous year's book value, to arrive at the current year's book value, to arrive at the current year's depreciation/ book value, which shows a declining depreciation/ book value, which shows a declining balance, weighted for earlier years and lower and balance, weighted for earlier years and lower and lower for later years, as the machine grows older.lower for later years, as the machine grows older.

• Accelerates depreciation taken in early years. Accelerates depreciation taken in early years. Reduces the amount taken in later years. Ignores Reduces the amount taken in later years. Ignores salvage value; starts with depreciable base = asset salvage value; starts with depreciable base = asset cost.cost.

  

• Many companies choose straight-Many companies choose straight-line method for reporting line method for reporting depreciation to shareholders depreciation to shareholders because net income is higher in because net income is higher in early year.early year.• Because net income is lower in early Because net income is lower in early years, some companies prefer the years, some companies prefer the written down value method, written down value method, especially for Income Tax purposes.especially for Income Tax purposes.  

Presentation BY :- NAKUL GAUR YASHASHVI PAL ROMA KHATRI BHOOMIKA KHANDELWAL PARIDHI JASSICA BAHL NIKITA BASSI SHALINI BOSE