Financial Statement- Trading Account, Profit & Loss Account and Balance Sheet
Financial Statement
Financial statements are formal records of the financial activities of a business, person, or other entity. Financial statements are often referred to as Accounts, although the term financial statements is also used, particularly by Accountants. Financial statements provide an overview of a business or person’s financial condition in both short and long term. All the relevant financial information of a business enterprise, presented in a structured manner and in a form easy to understand, are called the financial statements. In Financial Statements we can include:
• Trading Account
• Profit and Loss Account
• Balance Sheet
Trading Account
This account is prepared to know the trading results or gross margin on trading of the business, i.e., how much gross profit the business has earned from buying and selling during a particular period. The difference between the sales and cost of goods sold is gross profit. For the purpose of calculating cost of goods sold, we take into consideration opening stock, purchases, direct expenses on purchasing or manufacturing the goods and closing stock.
Trading Account
For the year ended 31st March, 2009
| Particulars | Amount Rs. | Particulars | Amount Rs. |
|---|---|---|---|
| To Opening Stock
” Purchases Less : Purchases Returns To Direct Expenses Carriage Inward Wages Fuel and Power Manufacturing Expenses Coal, Water and Gas Motive Power Octroi Import duty Custom Duty Consumable Stores Foreman/ Works Manager’s Salary Royalty on Manufactured Goods To *Gross Profit c/d |
— | By Sales
Less : Sales Returns “ Closing Stock By Gross Loss* c/d |
— |
Profit and Loss Account
This account is prepared to calculate the net profit of the business. There are certain items of incomes and expenses of the business which must be taken into consideration for calculating net profit of the business. These are of indirect nature, i.e., concerning the whole business and relating to various activities which are done by the business for the purpose of making the goods available to the consumers. Indirect expenses may be selling and distribution expenses, management expenses, financial expenses, extraordinary losses and expenses to maintain the assets into working order.
Profit and Loss Account
For the year ended 31st March, 2009
| Particulars | Amount Rs. | Particulars | Amount Rs. |
|---|---|---|---|
| To Gross Loss b/d
To selling and Distribution Expenses : Advertisement Travellers’ Salaries, Expenses & Commission Bad Debts Godown rent Export Expenses Carriage Outwards Bank Charges Agent’s Commission Upkeep of Motor Lorries To Management Expenses : Rent, rates and Taxes Heating and Lighting Office Salaries Printing & Stationery Postage & Telegrams Telephone Charges Legal Charges Audit Fees Insurance General Expenses To Depreciation and Maintenance: Depreciation Repairs & Maintenance To Financial Expenses: Discount Allowed Interest on Capital Interest on Loans Discount on Bills To Extraordinary Expenses: Loss by Fire (not covered by Insurance) Cash Defalcation To Net Profit transferred to Capital A/c. |
- | By Gross profit b/d
” Interest Received ” Discount ” Commission ” Rent from Tenants ” Income from Investments ” Apprenticeship Premium ” Interest on Debentures ” Income from any other Source ” Miscellaneous revenue Receipts ” By Net Loss transferred to Capital A/c* |
- |
Balance Sheet
A Balance Sheet is a statement prepared with a view to measure the financial position of a business on a certain fixed date. The financial position of a concern is indicated by its assets on a given date and its liabilities on that date. Excess of assets over liabilities represent the capital and is indicative of the financial soundness of a company. A balance Sheet is also described as a “statement showing the sources and application of capital”.
Assests= Liabilities+ Equity
Balance Sheet Table
| Liabilities | Amount Rs. | Assets | Amount Rs. |
|---|---|---|---|
| Current Liabilities
Bill Payable Sundry Creditor Bank Overdraft Long Term Liabilities: Loan from Bank Debentures Fixed Liabilities: Capital Total |
- | Liquid Assets:
Cash in Hand Cash at Bank Floating Assets: Sundry debtors Investments Bills Receivable Stock in Trade Prepaid Expenses Fixed Assets: Machinery Building Furniture & Fixtures Motor Car Intangible Assets Goodwill Patents Copyright Licenses Fictitious Assets: Advertisement Misc. Expenses Profit & Loss A/c Total |
- |
(i) Closing Stock
1. Stock being debit balance will be shown on the assets side of the Balance Sheet.
2. It will be shown on the credit side of the Trading Account.
(ii) Outstanding Expenses
1. Outstanding expenses will be shown on the debit side of the trading or profit and loss account by way of addition to the expenses and
2. Outstanding expenses will be shown on the liabilities side of the Balance Sheet.
(iii) Prepaid (or Unexpired) Expenses
1. Prepaid expenses will be shown in the profit and loss account by way of deduction from the expenses and
2. Prepaid expenses being debit balance will be shown on the assets side of the Balance Sheet.
(iv) Accrued Income
1. It will be shown on the credit side of profit and loss account by way of addition to income, and
2. Accrued Income being debit balance, will be shown on the assets side of the Balance Sheet.
(v) Income received in Advance
1. it is shown on the credit side of profit and loss account by way of deduction from the income, and
2. Income received in advance, being credit balance, is shown on the liabilities side of the Balance Sheet.
(vi) Depreciation
1. Depreciation is shown on the debit side of Profit and Loss Account, and
2. It is shown on the assets side by way of deduction from the value of concerned asset.
(vii) Bad Debts
1. Shown on the debit side of Profit and Loss Account, and
2. Shown on the assets side of the Balance Sheet by way of deduction from sundry debtors.
(viii) Interest on Capital
1. Interest on capital will be shown on the debit side of Profit and Loss Account.
2. It will be shown on the liabilities side of the Balance Sheet by way of addition to the capital.
(ix) Interest on Drawing
1. Interest on drawing will be shown on the credit side of Profit and Loss Account, and
2. Interest on drawings is shown on the liabilities side of the Balance Sheet by way of addition to the drawings which are ultimately deducted from the Capital.
(x) Provision for Doubtful Debts
1. It will be shown on the debit side of the profit and Loss Account or by way of addition to Bad debts. (Old provision for doubtful debts at the beginning of the year will be deducted).
2. Provision for Doubtful Debts is shown on the assets side of the Balance Sheet by way of deduction from Sundry debtors (after deduction of further bad debts, if any.)
(xi) Reserve for Discount on Creditors
1. It is shown on the credit side of Profit and Loss Account and
2. Reserve for Discount on Creditors is shown on the liabilities side of the Balance Sheet by way of deduction from sundry creditors.
(xii) Deferred revenue Expenditure
1. It is shown on the debit side of Profit and Loss Account, and
2. It is shown on the assets side by way of deduction from capitalized expenditure.
(xiii) Loss of Stock by Fire
(a) If the stock if fully insured.
• It will be shown on the credit side of Trading Account, and
• It is shown on the Assets side of the Balance Sheet.
(b) If the stock is partly insured,
• It will be shown on the credit side of Trading Account with the value of stock and shown on the debit side of Profit and Loss Account for that part of the stock which is not insured, and
• Loss of Stock by Fire is shown on the Assets side of the Balance Sheet with the amount which is to realized from the insurance Co., i. e., that part of the loss which is insured.
(c) If the stock is not insured at all
• It is shown on the credit side of the Trading Account, and
• It is shown on the debit side of the Profit and Loss Account.
(xiv) Reserve Fund
1. It is shown on the debit side of Profit and Loss Account along with net profit in the inner column, and
2. Is shown on the liabilities side of the Balance Sheet. If reserve fund is already there, it will be shown by addition to the existing reserve fund on the liabilities side of the Balance Sheet.
(xv) Goods Distributed as Free Samples
1. It is deducted from the purchases, and
2. It is also shown on the debit side of Profit and Loss Account advertisement expenses.
(xvi) Manager’s Commission
Commission Payable = % of commission / 100 + Rate of commission × Residual Profit In the above case, the commission payable will be Rs. 3,000 (i.e., 10/110 × 33,000)
1. Such commission will be shown on the debit side of the profit and Loss Account, and
2. Is shown on the Assets side as a deduction from sundry debtors (sale price) and stock at cost on the Assets side of the Balance Sheet.
(xviii) Hidden Adjustments
1. It will be shown on the debit side of the profit and Loss Account by way of addition to the interest on loan, and
2. Interest on Loan is shown on the liabilities side of the Balance Sheet by way of addition to the loan account.
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