FINANCIAL STATEMENTS

Reference Books: Accountancy by D. K. Goel Rajesh Goel OR Double 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) (2) (3) Opening Stock Purchase & Purchase Return 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: 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. Carriage or Carriage Inwards or Freight :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. Dock Charges:- If dock charges are paid on import of goods then they are shown on the side of trading account. In the absence of specific instructions, these are debited to trading account. Import Duty or Custom Duty :Excise Duty Royalty

(I)
y

(II) (III)

(IV)

debit

(V) (VI) (VIII)

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: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 etc Fixed 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 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
Capital Add : Net profit Less : Drawings Less : Income Tax Less : Life insurance premium Reserves Fixed liabilities:Long term loans Current Liabilities:Bank overdraft Bills payable Sundry creditors Outstanding expenses Unearned Income

Amount Assets
Fixed Assets:Furniture Loose Tools Motor Vehicle Plant & Machinery Land & Building Goodwill INVESTMENTS Long Term Investment Current Assets:Cash Bank Bills Receivable Short Term Investment Sundry Debtors Closing Stock Prepaid Expenses Accrued Income Misc. Exp. to the extent not written off.

Amount

Format of Vertical Form of Balance Sheet Balance Sheet of xxx Ltd. as on March 31st, xxxx I Sources of funds 1 Shareholders Funds a. Share Capital Authorised Capital Issued capital Reserves and Surplus Xxx Rs.

b.

Xxx

XXX

Loan Funds a. b. Secured Loans Unsecured Loans xxx xxx XXX XXXX

Application of Funds 1 2 3 Fixed Assets Investments Current Assets, Loans and Advances Less: Current liabilities and Provision Net Current Assets Miscellaneous Expenditures xxx xxx XXX XXX xxx

xxx xxxx

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

Plant & Machinery Land & Building Furniture Cash In Hand Bank Overdraft Debtors & creditors Bills Receivable & Bills Payable Closing stock Investment (Short Term) Capital Drawings Net Profit

80000 60000 15000 2000 32000 10000 40000 8000 13000 260000 62000 260000 18000 24000 6000

150000

Prepare final accounts as on 31st December 1993

Opening 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 15310 82400 256000 4000 2400 18000 11500 6000 36600 7500 1200 5850 2000 4800 2600 5000 8700 250000 48000 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 57000 12000 4200 500 4460 4000 180 3600 42000 150000 2000 20000 10000 5000 25000 3000

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

VALUATION OF ASSETS
y y y y y y y y

Cost lower of cost & Realizable value At cost At cost 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.

Cash in hand / Bank Marketable securities Deposits Prepaid Exp. Account receivable