Module 2.

Financial Statements

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Financial Statements
Introduction
Balance Sheet

Elements of Balance Sheet

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Financial Statement
Financial statements are records that
provide an information of an
individuals, organizations, or
business financial status.

They are normally prepared general or

specific purposes.

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General purpose Financial Statement
examples
Balance Sheet

Profit and Loss A/c

Cash Flow Statement

Fund Flow Statement

Segment Revenue Report

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Specific purpose Financial Statement
examples
Departmental Budget

Computation prepared for Income

Tax Purpose

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Balance Sheet
Balance Sheet portrays value of
economic resources controlled by an
enterprises and the way they are
financed.
A balance sheet or statement of
financial position is a summary of the
financial balances of an entity on a
particular point of time. i.e. summary
of organization's assets, liabilities and
equity as of a specific date.
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Balance Sheet (Format)
Liabilities Rs. Assets Rs.
Owners Fund XX Fixed Assets XX

Non Current XX Non current XX

Liabilities Investments
Current Liabilities XX Current Assets XX

Every balance sheet shall give a true and

fair view of state of affairs of the company
as at the end of financial year.
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 Particulars As at As at
(format as per 31st 31st
revised Schedule Mar Mar
VI) 2011 2010

I. EQUITY AND
LIABILITIES

1 Shareholder's
Funds
(a) Share Capital
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- -
 (b) Reserves and Surplus

-
-
(c) Money received against
Share Warrants

-
-

2 Share Application Money

pending allotment
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(b) Deferred Tax Liabilities
(Net)

-
-
(c) Other Long Term Liabilities

-
-
(d) Long-Term Provisions

Dr. Varadraj Bapat -

-
 (c) Other Current Liabilities
- -

(d) Short-Term Provisions

- -

TOTAL
- -

II. ASSETS Dr. Varadraj Bapat

 (iii) Capital work-in-progress

-
-
(iv) Intangible assets under
development
-
-

(b) Non-Current Investments

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-
-
2 Current Assets

(a) Current Investments

- -

(b) Inventories
- -

(c) Trade Receivables

- -

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Elements of Balance Sheet
Assets

Liabilities

Owners Fund

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Assets
Probable future economic benefit
What is owned or controlled

Examples
Cash
Land and Building
Investments
Machinery
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An asset is a resource controlled by
the enterprise as a result of past
events from which future economic
benefits are expected to flow to the
enterprise.

Resource must have a cost or value

that can be measured reliably

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Types of assets
Fixed Assets
Current Assets
Investments

Fixed
Assets

Tangible Intangible
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 In-
Tangible
tangible
Land &
Goodwill
Building

Trade-
Machinery
Marks

Furniture Patents
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 Current Assets

Monetary Non-Monetary

Debtors RM Stock

Bank FG Stock

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Liabilities
A liability is a present obligation of
the enterprise arising from past
events, the settlement of which is
expected to the result in an outflow of
a resource embodying economic
benefits.
A liability is an existing obligation

based on the evidence available on

balance sheet date.
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A liability is recognised when outflow
of economic resources in settlement
of present obligation can be
anticipated and the value of outflow
can be reliably measured.

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 Long-Term Liabilities
Long-term liabilities are a
company's debts or obligations
that are to be repaid or performed
beyond one year.
Source of fund
Examples:
Bank Loan
Loan from Financial Institution
Debentures
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 Current Liabilities

Current liabilities are a company's

debts or obligations that are to be
repaid or performed within one
year.
Emerge from normal business
Examples:
Creditors (Accounts Payable)
Outstanding Expenses

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 Current Liabilities

Interest accrued but not due on

Loan
Provision for Tax
Bank Overdraft

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Provision:
Provision means any amount retained
by way of providing for any known
liability of which amount can not be
determined with substantial accuracy.

Provision refers to an amount set

aside for meeting claims which are
admissible but the amount whereof
has not been confirmed.

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 Examples

Provision for payment of electricity

charges (but bill is not yet received).
Provision for taxes (till final amount
is assessed by authorities.)
Provision for bonus
Amount set aside for writing off bad
debts.
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 Contingent Liability
Contingent liability can be defined as
a) a possible obligation that arises
from past events and the existence
of which will be confirmed only by
occurrence or non-occurrence of
one or more uncertain future
events not wholly within the
control of the enterprise
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b) a present obligation that arises
from past events but is not
recognised because:
i) it is not probable that an outflow
of resources consisting economic
benefits will be required to settle
the obligation or

ii)a reliable estimate of the amount

of the obligation cannot be made.
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Owners Fund
Owners fund is defined as residual
interest of an enterprises after
deducting all its liabilities.

Owners fund is the excess of

aggregate assets of an enterprises
over its aggregate liabilities.

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Balance Sheet Equation

Assets= Liabilities + Owners Fund

Therefore,
Owners Fund= Assets Liabilities

Owners Fund= Capital + Retained

Earnings
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Balance Sheet Equation

A=L+O
1. Company borrows from bank

+ + (+ Bank, + Bank Loan Payable)

2. Issue of shares by company

+ + (+ Bank, + Equity Shares)

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 3.(a) Cash purchase of equipment
3.(b) Collection of Debtors
(a) +, (+ Equipment, - Bank)
-
(b) +, (+ Bank, - Debtors)
-
4.(a) Company repays bank loan
4.(b) Payment of Creditors / supplier
(a) - - (- Loan Payable, - Bank)
(b) - - (- Creditors, - Bank)
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A=L+O
5. Company pays dividend to shareholders

- - (- Bank, - Reserves)

6. Company purchases shares from

shareholder, pays immediately
(buy-back of shares)

- - (- Bank, - Equity Capital)

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A=L+O
7. Liability is converted into equity shares

e.g., loan is converted into equity

shares
- + (- Loan Payable, + Equity shares)

8. Company incurs new liability to pay

existing liability, e.g., Creditors are
converted into long-term loan

+,- (- Creditors, + Loan Payable)

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 A=L+O
9. Company distributes stock dividend to
stockholders (Bonus Shares)

+, (+ Equity Capital, -
- Reserves)

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Vertical Format of Balance
Sheet
Sources of Funds Rs. Rs.
Owners Fund XX
Borrowing Funds
Secured Loan XX
Unsecured Loan XX XX
Total Capital Employed XX

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Application of Fund Rs. Rs.
Fixed Assets XX
Investments XX
Working Capital
Current Assets XX
Current Liabilities (XX)
Net Working Capital XX
Total Assets Employed XX

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Every company has to prepare
balance sheet in the form set out in
Part I of Schedule VI of Companies
Act.

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 Exercise 1
1. On January 2, owners invest
Rs.15,000 in ShriRam Company to
begin the business.
2. On January 3, ShriRam Company

borrows Rs. 10,000 from

DhanLakshmi Bank.
3. On January 5, ShriRam Company
purchases Rs. 18,000 of inventory
from suppliers. Payment due on Jan
8.
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4. On January 9, ShriRam Company
sells inventory that cost Rs. 6,000
for Rs. 8,000 in cash.
5. On January 10, ShriRam
Company pays for inventory
purchased on January 5.
6. On January 12, ShriRam
Company sells inventory that cost
Rs. 5,000 for Rs. 6,000, on
account. Payment will be received
on January 31.
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7. On January 31, ShriRam
Company collects the account
receivable and puts in bank.

Prepare Balance sheet of the

concern after each transaction.

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1. On January 2, owners invest
Rs.15,000 in ShriRam
Company to begin the
business.
ShriRam Company
Balance Sheet
January 2, Year 1
Liabilities Assets
Capital 15,000 Bank 15,000

Total 15,000 Total 15,000

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 2. On January 3, ShriRam
Company borrows Rs. 10,000
from DhanLakshmi Bank.
ShriRam Company Balance Sheet
January 3, Year 1
Liabilities Assets
Paid-up 15,000 Bank 25,000
capital
DhanLakshmi 10,000
Bank Loan
Total 25,000 Total 25,000
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3. On January 5, ShriRam
Company purchases Rs. 18,000 of
inventory from suppliers, on
account Payment due on January 8
ShriRam Company Balance Sheet
January 5, Year 1
Liabilities Assets
Paid-up capital 15,000 Bank 25,000
DhanLakshmi 10,000 Inventory 18,000
Bank Loan
Accounts 18,000
Payable/Creditors
Total 43,000 Total
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43,000
4. On January 9, ShriRam
Company sells inventory that
cost Rs. 6,000 for Rs. 8,000 in
cash.ShriRam Company Balance Sheet
January 9, Year 1
Liabilities Assets
Paid-up capital 15,000 Bank 33,000
Reserves 2,000 Inventory 12,000
DhanLakshmi 10,000
Bank Loan
Creditors 18,000
Total 45,000 Total 45,000
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5. On January 10, ShriRam
Company pays for inventory
purchased on January 5.
ShriRam Company Balance Sheet
January 10, Year 1
Liabilities Assets
Paid-up capital 15,000 Bank 15,000
Reserves 2,000 Inventory 12,000
DhanLakshmi 10,000
Bank Loan
Creditors Nil
Total 27,000 Total 27,000
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6. On January 12, ShriRam Company
sells inventory that cost Rs. 5,000 for
Rs. 6,000, on account. Payment will
be received on January 31
ShriRam Company Balance Sheet
January 12, Year 1
Liabilities Assets
Paid-up capital 15,000 Bank 15,000
Reserves 3,000 Inventory 7,000
DhanLakshmi 10,000 Debtors 6,000
Bank Loan
Total 28,000 Total 28,000
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7. On January 31, ShriRam
Company collects the debtors
and puts in bank.
ShriRam Company Balance Sheet
January 31, Year 1
Liabilities Assets
Paid-up capital 15,000 Bank 21,000
Reserves 3,000 Inventory 7,000
DhanLakshmi 10,000 Debtors Nil
Bank Loan
Total 28,000 Total 28,000
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 Exercise 2:
Show the effect of each transaction
on the balance sheet of M/s. Krishna
Book Stores
Shyam and Murlidhar set up a book

stall M/s. Krishna Book Stores in their

town. On 1 Jan 2010, Shyam opened
new bank account in the name of
their partnership by depositing Rs.
100000 cash and Murlidhar brought
his own shop worth Rs. 200000 as
capital.
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 On 2 January 2010, store
purchased book of Rs. 75000 and
Stationary of Rs. 10000 on
immediate payment from SK
International.
On 5 January 2010, Stores supplies
books of Rs. 90000 (costing 60000)
to Saraswati Highschool. School
paid cheque Rs. 45000 immediately
and reaming amount will be paid on
10 January 2010.

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 On 9 January 2010, books costing
47000 purchased on credit from
SSK and Associates.
On 10 January 2010, Rs. 15000
received from Saraswati
Highschool.
On 15 January 2010, cheque of Rs.
47000 paid to creditors.

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Balance Sheet as on 1 Jan 2010
Liabilities Amount Assets Amount
Capital

Shyam 100000 Shop 200000

Premises
Murlidhar 200000 Bank 100000

300000 300000

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Balance Sheet as on 2 Jan 2010

Liabilities Amount Assets Amount

Capital
Shyam 100000 Shop 200000
Premises
Murlidhar 200000 Bank 15000
Inventory 85000

300000 300000

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Balance Sheet as on 5 Jan 2010
Liabilities Amount Assets Amount
Capital
Shyam 100000 Shop Premises 200000
Murlidhar 200000 Bank 60000
Profit and 30000 Sundry Debtors 45000
Loss A/c
Inventory 25000

330000 330000

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Balance Sheet as on 9 Jan 2010
Liabilities Amount Assets Amount
Capital
Shyam 100000 Shop 200000
Premises
Murlidhar 200000 Bank 60000
Profit and 30000 Inventory 72000
Loss A/c
Sundry 47000 Sundry 45000
Creditors Debtors
377000 377000
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Balance Sheet as on 10 Jan 2010
Liabilities Amount Assets Amount
Capital
Shyam 100000 Shop 200000
Premises
Murlidhar 200000 Bank 75000
Profit and 30000 Inventory 72000
Loss A/c
Sundry 47000 Sundry 30000
Creditors Debtors
377000 377000
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Balance Sheet as on 15 Jan 2010
Liabilities Amount Assets Amount
Capital
Shyam 100000 Shop 200000
Premises
Murlidhar 200000 Bank 28000
Profit and 30000 Inventory 72000
Loss A/c
Sundry 30000
Debtors
330000 330000
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