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Notes
FINANCIAL STATEMENTS
(WITHOUT ADJUSTMENTS)
In the previous lessons you have learnt to record the business transactions in different books of accounts and their posting into the main book i.e. ledger. You have also learnt the balancing of accounts and preparation of trial balance. One of the important purposes of accounting is to find out the profit or loss of a business for a particular accounting period and also to know its financial position on a particular date.
For this purpose, Income Statement and Position Statement are prepared every year by all business organisations. Income statement is divided into two parts, which are as follows: (i) Trading Account and (ii) Profit and Loss Account.
Income Statement is prepared to know the earnings of a business during a particular accounting year or the loss suffered during the year. Position Statement, also known as Balance Sheet, is prepared to know the financial position of a business on a particular date.
In this lesson you will learn as to how the financial statements are prepared to find out the profit for an accounting year and to know its financial position on a particular date.
After studying this lesson you will be able to:
- explain the meaning of financial statements;
- explain the objectives of financial statements;
- classify the financial statements into Trading Account, Profit and Loss Account and Balance Sheet and
- prepare Trading Account, Profit and Loss Account and Balance Sheet.
MODULE - V
Preparation of Financial Statements
OBJECTIVES
Notes
14.1 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.
14.2 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.
14.3 CLASSIFICATION OF FINANCIAL STATEMENTS
Financial Statements of a sole trader comprise of the following statements: I. Income Statement (i) Trading Account and (ii) Profit and loss Account II. Position Statement or Balance Sheet
MODULE - V Financial Statements (Without Adjustment) Preparation of Financial Statements
Notes
Solution Trading Account of M/s Luxmi & Sons Dr. for the year ended March 31, 2012 Cr. Particulars Amount Particulars Amount ( ) ( ) To Opening Stock 6,500 By Sales 72, To Purchases 45,000 Less : Returns 1,500 70, Less : Returns 500 44,500 By Closing Stock 8, To Carriage 1, To Wages 4, To Fuel & Power 3, To Gross Profit transferred to P & L A/c (Balancing Figure) 18, 78,500 78,
Illustration 2 From the following balances extracted from the books of M/s Bhanu Bros, prepare a Trading Account for the year ended 31 st^ March, 2012. Particulars Amount () Opening Stock as on 1.4.2011 32, Purchases 1,65, Freight 4, Power 6, Custom Duty 5, Sales 80, Closing Stock as on 31st^ March, 2012 30, **Solution Trading Account of M/s Bhanu Bros. Dr. for the year ended March 31, 2012 Cr. Particulars Amount Particulars Amount** ( ) ( ` ) To Opening Stock 32,000 By Sales 80, To Purchases 1,65,000 By Closing Stock 30, To Freight 4,000 By Gross Loss To Power 6,500 transferred to P & L A/c To Custom Duty 5,500 (Balancing Figure) 1,03, 2,13,000 2,13,
MODULE - V Financial Statements (Without Adjustment) Preparation of Financial Statements
Notes
Fill in the blanks with suitable word/words : i. Carriage is debited to ____________ account. ii. Total Sales – Sales Returns = ____________ iii. Wages are debited to ____________ account. iv. Closing stock is shown on the ____________ side of Trading Account. v. Total Purchases – Purchase Returns = ____________
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. for the year ended_________ Cr.
Particulars **Particulars** To Gross Loss transferred By Gross profit transferred from Trading A/c ______ from Trading A/c ______ To Salaries ______ By Commission Received ______ To Office Rent ______ By Discount received To Printing & Stationery ______ from creditors ______ To Insurance Premium ______ By Rent Received ______ To Interest Paid ______ By Interest Received ______ To Freight outwards ______ By Net Loss Transferred to To carriage outwards ______ Capital Account To Discount Allowed to customers ______ (Balancing Figure) ______ To Postage ______ To Telephone Charges ______ To Office Expenses ______ To Sales Expenses ______ To Net Profit Transferred to Capital Account (Balancing Figure) ______
Illustration 3
From the following information, prepare Profit and loss Account of M/s Sahil Bros for the Year ending on 31.03.2012. ` Gross Profit 97, Discount allowed to customers 2, Printing and stationery 2, Office rent 5,
Financial Statements (Without Adjustment)
INTEXT QUESTIONS 14.
MODULE - V Preparation of Financial Statements
Notes
State whether the following statements are True or False: i. Carriage inward is shown in Profit& Loss Account. ii. Telephone expenses are shown in Trading Account. iii. Carriage outward is shown in P&L A/c. iv. Gross Profit is transferred from Profit & Loss Account to Trading Account.
Distinction between Trading Account and Profit and Loss Account
The distinction between Trading A/c and Profit & Loss A/c is as follows:
S.No. Trading Account Profit and Loss Account This account shows the gross This account shows the net profit or
- profit or gross loss for an net loss for an accounting year. accounting year. All direct expenses relating to All indirect expenses relating to
- business are shown on the business are shown on the debit side debit side of this account. of this account. All direct revenue items are All indirect revenue items are shown
- shown on the credit side of on the credit side of this account. this account. The balance of this account i.e. The balance of this account i.e. net
- gross profit or gross loss is profit or net loss is transferred to the transferred to P&L. A/c. capital account of the proprietor.
II. 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 to its owner, while external liabilities mean the amount payable to outsiders.
Financial Statements (Without Adjustment)
INTEXT QUESTIONS 14.
MODULE - V Preparation of Financial Statements
Notes
Classification of Internal and External Liabilities Internal liabilities External liabilities a. Capital Creditors b. Profits of business Bank loan and other loans c. 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 Current Assets a. Land and building Cash in hand b. Plant &Machinery Cash at Bank c. Furniture Stock of goods d. Motor Vehicles etc. Debtors etc. Objectives of Preparing Balance Sheet Balance sheet is prepared to achieve following objectives: i) To know the financial position of the business. ii) To know the position of internal liabilities and external liabilities of the business so that timely arrangement can be made for their payment. iii) To know the position of fixed assets and current assets. iv) To plan activities for future on the basis of present financial position. Proforma of Balance Sheet Balance Sheet of M/s ______________ as on _________________ Liabilities **Assets** Bank overdraft _______ Cash in hand _______ Creditors _______ Cash at Bank _______ Loans/Bank Loan _______ Debtors _______ Capital _______ Stock _______ Add : Net Profit _______ Investments _______ Less : Net Loss _______ Furniture _______ Less Drawings _______ _______ Motor Vehicles _______ Plant & Machinery _______ Land & Building _______
MODULE - V Financial Statements (Without Adjustment) Preparation of Financial Statements
Notes
Loan 50, Plant & Machinery 32, Land & Building 52, Capital 1,37, Net Profit 12, Drawings 10, Solution Balance Sheet of Mr. Arun Kumar Dr. as on March 31, 2012 Cr. Liabilities **Assets** Creditors 30,000 Cash in hand 24, Loan 50,000 Cash at Bank 27, Capital 1,37,000 Debtors 35, Add : Net Profit 12,000 Stock 22, 1,49,000 Furniture 25, Less : Drawings 10,000 1,39,000 Plant & Machinery 32, Land & Building 52, 2,19,000 2,19,
I. Fill in the Blanks : i. Assets are shown on the _________ side of the Balance Sheet. ii. Capital is shown on the liabilities side of _________. iii. Total of Assets side and liabilities side of balance sheet are always _________. iv. Stock is an example of ___________ asset. v. Furniture is an example of ___________ asset. II. Classify the following assets as fixed assets and current assets: Assets Type of Asset (Fixed or Current) i. Debtors ii. Land & Building iii. Plant & Machinery iv. Cash at Bank v. Motor Vehicle vi. Cash in hand
Financial Statements (Without Adjustment)
INTEXT QUESTIONS 14.
MODULE - V Preparation of Financial Statements
Notes
Illustration 7
From the following Balances of M/s Pawan Sales on 31/3/2012, prepare a Trading and Profit & Loss Account and a Balance Sheet as on that date.
Particulars Amount Particulars Amount ( ) ( ) Drawings 8,000 Sales 2,58, Capital 48,000 Return Inwards 2, Sundry Creditors 80,000 Return Outwards 2, Sundry Debtors 1,26,000 Office Salaries 18, Bills Receivable 10,000 Manufacturing Wages 8, Opening stock 90,000 Commission 9, Fixtures and Fittings 13,000 Trade Expenses 5, Cash in hand 2,000 Rent 4, Machinery 24,800 Discount received 8, Bank Overdraft 10,000 Bills Payable 14, Purchases 1,00,
The closing stock on 31.3.2012 was ` 1,04,
Solution
Trading and Profit and Loss A/c M/s Pawan Dr. for the year ended March 31, 2012 Cr.
Particulars Amount Particulars Amount ( ) ( ) To Opening Stock 90,000 By Sales 2,58, To Purchases 1,00,000 Less : Returns 2,000 2,56, Less : Returns 2,200 97,800 By Closing Stock 1,04, To Manufacturing Wages 8, To Gross Profit c/f 1,64, 3,60,000 3,60, To Office Expenses 18,000 By Gross Profit b/f 1,64, To Commission 9,000 By Discount received 8, To Trade Expenses 5, To Rent 4, To Net Profit c/f 1,35, 1,72,200 1,72, Balance Sheet as on March 31, 2012 Liabilities **Assets** Bills Payables 14,000 Cash in hand 2, Sundry Creditors 80,000 Bills Receivable 10, Bank Overdraft 10,000 Sundry Debtors 1,26,
Financial Statements (Without Adjustment) MODULE - V Preparation of Financial Statements
Notes
- Financial Statements are prepared to ascertain the Gross Profit and Net profit earned by a business enterprise during a period and the positions of its assets and liabilities on a particular date, generally on the last date of the accounting year.
- Trading account is prepared to ascertain gross profit earned or gross loss suffered during a period and profit and loss account is prepared to ascertain the net profit earned or net loss suffered by the business during a period. Trading and profit and loss account taken together is called income statement.
- Balance sheet is prepared to know the position of assets and liabilities of the business on a particular date. This is called the position statement.
- Financial statements are prepared to know the result of business activities, to know the financial position of the business, to help in decision making, to judge the performance of the management, to know the cash position of the business etc.
- What do you mean by term financial statements?
- State the objectives of preparing financial statements.
- State the objectives of preparing Balance Sheet.
- Distinguish between direct expenses and indirect expenses.
- Distinguish between Trading Account and Profit and Loss Account.
- Give five examples each of fixed assets and current assets.
- Give three examples each of internal liabilities and external liabilities.
- From the following balances prepare trading account for the year ended 31 st^ March 2012 Particulars
**Particulars** Opening Stock 6,000 Purchases 11, Purchase return 500 Sales 48, Sales return 600 Freight & Octori 500 Carriage on purchases 1,000 Wages 2, Factory lighting 600 Import duty 900 Office rent 1,200 Carriage on sales 3, Coal, gas & water 800
Financial Statements (Without Adjustment)
WHAT YOU HAVE LEARNT
TERMINAL EXERCISE
MODULE - V Preparation of Financial Statements
Notes
- Prepare Profit and Loss account for the year ended 31 st^ March 2012 from the following particulars. Particulars
**Particulars** General Expenses 800 Gross Profit 32, Charity 100 Carriage on sales 900 Electricity charges 175 Office expenses 650 Law charges 180 Insurance premium 1, Advertisement 440 Telephone expenses 600 Commission 870 Sales tax 800 Rent 1,800 Establishment expenses 700 Interest on investment 700 Miscellaneous expenses 750 Sundry receipts 700 Discount received 1, Indirect expenses 340 Traveller salary 300 Printing and stationary 65 Repair 270 - From the following trial balance of Gopal Nath and Sons, prepare Trading and Profit and Loss Account for the year ending 31 st^ December 2012 and a Balance Sheet as at that date: Particulars
**Particulars** Opening Stock 4,000 Bills Payable 1, Purchases 12,000 Purchase return 300 Carriage 1,170 Sundry creditors 2, Wages 1,000 Sales 20, Sales return 200 Capital 30, Drawings 1,500 Commission received 120 Office expenses 250 Salaries 1, Discount 300 Repairs 1, Advertisements 500 Sundry debtors 6, Plant & Machinery 12, Building 10, Cash in hand 600 Cash at bank 2, 54,320 54, The value of stock in hand on 31 st^ December 2012 was ` 6,000.
MODULE - V Financial Statements (Without Adjustment) Preparation of Financial Statements
