FINANCIAL STATEMENTSReference Books: Accountancy by D. K. Goel Rajesh Goel ORDouble Entry Book keeping by T. S. Grewal

FINANCIAL STATEMENTS Financial Statements refer to such statements which report the profitability and the financial position of the business at the end of accounting period. It includes

ITrading and Profit & loss a/c which shows the results of the business operations during an accounting period

IIBalance Sheet which shows financial position of an enterprise at a specified point of time.

TRADING ACCOUNT

Trading account is prepared to show the results of buying and selling of goods. All expenses which either relate to purchase of raw material or manufacturing of goods are recoded in the trading account. Such expenses are called direct expenses.

Preparation of Trading Account Items written on the Dr. side of the Trading Account :- (1) Opening Stock(2) Purchase & Purchase Return(3) Direct Expenses - All expenses incurred in purchasing the goods, bringing them to the godown and manufacturing of goods are called direct expenses. Direct Expenses Include the following:

(I) Wages :- If the item 'Wages and Salaries' is given in the question it will be shown on the trading a/c. On the contrary, if 'Salaries and Wages is given it will be shown on the profit & loss account. If wages are paid for bringing or installing a new machinery it will be added to the cost of machine and hence will not be shown in the trading account. (II) Carriage or Carriage Inwards or Freight :-(III) Manufacturing Expenses :- All expenses incurred in the manufacture of goods are shown on the debit side of the trading account such as Coal, Gas, Fuel, Water, Power. Factory Rent, Factory Lighting etc. (IV) Dock Charges:- If dock charges are paid on import of goods then they are shown on the debit side of trading account. In the absence of specific instructions, these are debited to trading account.(V) Import Duty or Custom Duty :-(VI) Excise Duty(VIII) Royalty

Items written on the Cr. side of the Trading Account :- (I) Sales & Sales Returns(II) Closing Stock

Closing stock is valued at Rs 60,000/

PROFIT & LOSS ACCOUNT Profit & Loss A/c is an account in which all gains and losses are recorded, in order to ascertain the excess of gains over losses or vice versa

Items written on the Dr. side of the Profit & Loss Account :-Gross Loss Office & Administrative Expenses:- Salary of office employees, office rent, lighting, postage, printing, legal charges, audit fee etc. Selling and Distribution Expenses :- Such as advertisement, charges, commission, carriage outwards, bad-debts, packing charges, etc.. Miscellaneous Expenses :- Such as interest on loan, interest on capital, repair charges, depreciation, etc..

Items written on the Cr. side of Profit & Loss Account:- #Gross Profit #Other Incomes and Gains. :- Such as income from investments, rent received, discount received, commission earned, interest received etc.NOTE:@Those expenses which are not related to business are not written in profit & loss account@Only those items of expense and income are shown in Profit & Loss a/c which are not shown in trading a/c

From the following particulars, prepare a Profit & Loss Account for the year ending 31st December 1993 :-

Gross ProfitTrade ExpensesCarriage on salesOffice salariesPostage and TelegramOffice rentLegal chargesAudit feeDonationSundry ExpensesSelling expensesRs.2,10,5002,00010,00015,8007207,5004001,6001,1003605,320Discount AllowedLightingCommission receivedBad debtsDiscount (Cr.)Interest on loanExport dutyMisc. ReceiptsUnproductive expensesTraveling expensesRs.3,0007808401,2006002,2002,3005004,1002,500

BALANCE SHEET A balance sheet is a statement of those assets and liabilities of a business enterprise that can be given a value in terms of money; it shows both the assets and how the assets are financed; the figures are estimates, not scientific facts.The liabilities indicate what money has been made available to the enterprise, and from where.The assets show how the enterprise has used the money made available to it.Total assets must always equal total liabilities to creditors and shareholders. Every balance sheet must include the name of enterprise and the date to which the figures in the balance sheet refer.

The ASSETS of a business enterprise are usually listed on a balance sheet in the following groups : Fixed assets, investment, current assets and fictitious assets.

FIXED ASSETS: are those which are acquired for continued use and last for many years such as Land, building, Plant , machinery etcFixed assets can be tangible or intangible assets.INTANGIBLE ASSETS: Assets which cannot be touched or seen, like goodwill, patent etc.

CURRENT ASSETS: are those which are either in the form of cash or can be easily converted into cash within one year of the date of balance sheet such as debtors, account receivable, bills receivable, inventory, etc.

INVESTMENT: Investment include investment in government securities, in shares, debentures or bonds and also in immovable properties and in the capital of a partnership firm. Out of these investments, only marketable securities which are readily converted into cash should be taken as part of current assets for all practical purposes.

FICTITIOUS ASSETS: eg. Deferred revenue expenditure, misc. expenditure to the extent not written off.

THE FUNDING SIDE OF THE BALANCE SHEET LIABILITIES

The liabilities are listed on a balance sheet into three main groups : Share holders fund (capital), fixed liabilities and current liabilities.

SHARE HOLDERS FUND: The shareholders are the owners of the company. On the balance sheet the funds they provide are shown separately from those of outsiders who have loaned money to the company.

CURRENT LIABILITIES AND FIXED LIABILITIES are together referred to as outside liabilities.

FIXED LIABILITIES represent the companys long-term finance, and include items on which interest is payable, such as long-term loans from financial institutions.

CURRENT LIABILITIES represent the companys short-term finance, and include items like short-term loans, bank overdrafts and trade accounts payable (trade creditors).Interest always has to be paid on bank loans, but most other current liabilities do not require the payment of interest. Apart from bank financing, then, current liabilities generally represent low-cost finance for the company.

SHAREHOLDERS FUNDWhen a company is formed, it needs money to carry on its activities; a good deal of this money usually comes from the shareholders, who buy shares in the company.The money which the shareholders put into the company in this way is described on the balance sheet as the capital issued and paid up. In return, at the discretion of the directors, the company makes payments, to shareholders (pays dividends) out of the profits made by the company.In addition to the capital subscribed, shareholders funds also include capital reserve and revenue reserve, which represent profits retained in the business and not paid to shareholders.

CAPITAL RESERVE, REVENUE RESERVE, CAPITAL AUTHORISED AND CAPITAL ISSUEDProfits made in the course of normal operation of an enterprise and retained in the business are called revenue reserve.Increased value from the revaluation of fixed assets is called capital reserve.The amounts on the balance sheet for revenue reserve and capital reserve do not reflect the amount made during the year. Rather, they are cumulative totals for the years upto the date of balance sheet.

Authosired Capital: is the value of share capital which the company is authorised to issue.Issued Capital: is the value of share capital which the company has actually issued.

BALANCE SHEET OF XYZ as on 31st March ____

LiabilitiesAmountAssetsAmountCapitalAdd : Net profitLess : DrawingsLess : Income TaxLess : Life insurance premium

Reserves

Fixed liabilities:-Long term loans

Current Liabilities:-Bank overdraftBills payableSundry creditorsOutstanding expensesUnearned IncomeFixed Assets:-FurnitureLoose ToolsMotor VehiclePlant & MachineryLand & BuildingGoodwill

INVESTMENTSLong Term Investment

Current Assets:-CashBankBills ReceivableShort Term InvestmentSundry DebtorsClosing StockPrepaid ExpensesAccrued Income

Misc. Exp. to the extent not written off.

Format of Vertical Form of Balance SheetBalance Sheet of xxx Ltd. as on March 31st, xxxx

ISources of funds Rs.1Shareholders Funds Share Capital Authorised Capital Issued capital Xxx

b. Reserves and Surplus XxxXXX

2Loan Funds a. Secured Loans xxxb. Unsecured Loans xxxXXX XXXX 2Application of Funds 1Fixed Assets XXX

2Investments XXX

3Current Assets, Loans and AdvancesLess: Current liabilities and Provision Net Current Assets xxxxxxxxx4Miscellaneous Expenditures xxxxxxx

From the following balances , prepare a Balance Sheet as on 31st December, 1993

Plant & MachineryLand & BuildingFurnitureCash In HandBank OverdraftDebtors & creditorsBills Receivable & Bills PayableClosing stockInvestment (Short Term)CapitalDrawingsNet Profit8000060000150002000

3200010000400008000

13000

260000

18000240006000

150000

62000260000

Prepare final accounts as on 31st December 1993The value of closing stock on 31st December 1993 was Rs. 25400

Opening StockPurchaseSalesReturns (Dr)Returns (Cr)Factory RentCustom dutyCoal, gas & PowerWages & SalaryDiscount (Dr)Commission (Cr)Bad DebtsBad Debts RecoveredApprentice PremiumProductive ExpUnproductive ExpCarriageCapitalDrawings15310824002560004000240018000115006000366007500120058502000480026005000870025000048000S. DebtorsS. CreditorsDepreciationCharityCashCurrent A/cBank ChargesEstablishment ExpPlantLeasehold BuildingSales Tax CollectionGoodwillPatentsTrade MarksLoan Cr.Interest on loan5700012000420050044604000180360042000150000200020000100005000250003000

VALUATION OF ASSETSCash in hand / BankCostMarketable securitieslower of cost & Realizable valueDepositsAt costPrepaid Exp.At costAccount receivableFull value less provision of doubtful items Finished goods, WIP,At cost or market value whichever Raw materialis lessLandCostBuilding, Plant & Machinery,Cost less depreciationFurniture, vehicles.