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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.