FINANCIAL STATEMENTS

Reference 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

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

II Balance 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(VII)         Octroi(VIII)      Royalty

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

  Sometimes the Closing Stock is given inside the Trial Balance. In such a case, Closing Stock will not be shown in the trading a/c but will appear in the asset side of Balance Sheet only

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 Profit

Trade Expenses

Carriage on sales

Office salaries

Postage and Telegram

Office rent

Legal charges

Audit fee

Donation

Sundry Expenses

Selling expenses

Rs.

2,10,500

2,000

10,000

15,800

720

7,500

400

1,600

1,100

360

5,320

Discount Allowed

Lighting

Commission received

Bad debts

Discount (Cr.)

Interest on loan

Export duty

Misc. Receipts

Unproductive expenses

Traveling expenses

Rs.

3,000

780

840

1,200

600

2,200

2,300

500

4,100

2,500

 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.

CURREN LIABILITIES AND FIXED LIABILITIES are together referred to as

“outside liabilities”.

FIXED LIABILITIES represent the company’s long-term finance, and include

items on which interest is payable, such as long-term loans from financial

institutions.

CURRENT LIABILITIES represent the company’s 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 FUND

When 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 ISSUED

Profits 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 ____

Liabilities Amount Assets AmountCapitalAdd : Net profitLess : DrawingsLess : Income TaxLess : Life insurance premium

Reserves

Fixed liabilities:-Long term loans

Current Liabilities:-Bank overdraftBills payableSundry creditorsOutstanding expensesUnearned Income

Fixed Assets:-FurnitureLoose ToolsMotor VehiclePlant & MachineryLand & BuildingGoodwill

INVESTMENTS

Long 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

I Sources of funds Rs.

1 Shareholders Funds

a. Share Capital Authorised Capital Issued capital

Xxx

b. Reserves and Surplus Xxx XXX

2 Loan Funds

a. Secured Loans xxx

b. Unsecured Loans xxx XXX

XXXX

2 Application of Funds

1 Fixed Assets XXX

2 Investments XXX

3 Current Assets, Loans and AdvancesLess: Current liabilities and Provision Net Current Assets

xxxxxx

xxx

4 Miscellaneous Expenditures xxx

xxxx

POINTS TO BE REMEMBERED # The items which appear on the debit side of trial balance should be shown either an the debit side of the Trading or Profit and Loss A/c or on the assets side of the Balance sheet.# The items which appear on the credit side of trial balance should be shown either an the credit side of the Trading or Profit and Loss A/c or on the Liabilities side of the Balance sheet.# The balances of Personal and Real Accounts are always shown in the Balance Sheet.# If a trial balance is not given in the question, and it is not clearly stated whether a particular item is expense or income, it will be treated as expense such as Discount, Commission, Brokerages of Rent etc.# The total of both sides of the Balance Sheet will always be equal.

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 Profit

80000

60000

15000

2000

32000

10000

40000

8000

13000

260000

18000

24000

6000

150000

62000

260000

Prepare final accounts as on 31st December 1993Opening Stock

Purchase

Sales

Returns (Dr)

Returns (Cr)

Factory Rent

Custom duty

Coal, gas & Power

Wages & Salary

Discount (Dr)

Commission (Cr)

Bad Debts

Bad Debts Recovered

Apprentice Premium

Productive Exp

Unproductive Exp

Carriage

Capital

Drawings

1531082400

25600040002400

18000115006000

3660075001200585020004800260050008700

25000048000

S. Debtors

S. Creditors

Depreciation

Charity

Cash

Current A/c

Bank Charges

Establishment Exp

Plant

Leasehold Building

Sales Tax Collection

Goodwill

Patents

Trade Marks

Loan Cr.

Interest on loan

57000120004200500

44604000180

360042000

1500002000

20000100005000

250003000

The value of closing stock on 31st December 1993 was Rs. 25400

VALUATION OF ASSETS

• Cash in hand / Bank Cost• Marketable securities lower of cost & Realizable

value• Deposits At cost• Prepaid Exp. At cost• Account receivable Full value less provision of

doubtful items

• Finished goods, WIP, At cost or market value whichever Raw material is less

• Land Cost• Building, Plant & Machinery, Cost less depreciation

Furniture, vehicles.