After ascertaining the arithmetical accuracy of ledger account balances, a business concern proceeds to prepare financial statement or final accounts. Financial statement or final accounts are required to be prepared by every business concern at the end of every accounting year, because they provide valuable accounting information or financial information to a number of users of accounting information, such as the management, the shareholders or owners, the creditors, the employees, the consumers, the Government, the general public, etc.
Meaning of Financial Statements or Final Accounts
Financial statements, generally, refer to two statements, viz. (1) Income Statement or Profit and Loss Account and (2) Position Statement or Balance Sheet prepared at the end of every accounting year. The income statement or profit and loss account is prepared to ascertain the results of business operations called net profit or net loss of the business for an accounting year. The position statement or balance sheets is prepared to indicate the financial position or a business as the end of every accounting year. These two statements are called Financial statements or Final accounts.
Preparation of Financial Statement or Final Accounts
Profit and Loss account
Meaning of Trading Account: It is the account which shows merely the result of buying and selling of goods, i.e., gross profit or gross loss on trading without taking into account administration, selling and financial expenses incurred in running the business.
Advantages of Trading Account
A trading account helps the reader to know whether the line of business which he carries on (the goods in which he deals) is profitable or not. The gross profit revealed by the trading account helps the trader to ascertain the gross profit-turnover ratio, i.e., the percentage of gross profit on sales.
Format of Trading Account
Particulars To Opening Stock To Purchases Less: Purchase returns or Returns Outwards To Carriage To Freight inwards To Import duty To Clearing Charges To Wages To Power To Factory rent To Coal, gas and water To Profit & Loss A/c (Gross Profit transferred to P & L A/c)
Trading Account for the period ending ………..
Amount XXXX Amount Particulars Amount XXXX XXX XXXX By Sales Less: Sales returns or Returns Inwards XXXX By Closing Stock XXX XXX By Profit & Loss A/c XXX (Gross Loss transferred to XXX profit and loss A/c) XXX XXX XXX XXX
XXX XXXX XXXX
Profit and Loss Account
Meaning of Profit and Loss Account: The Profit and Loss Account is an account which shows the net profit or net loss (the ultimate or final profit or loss) of a business for a particular trading period. The net profit or net loss is the profit earned or loss suffered after charging all business expenses (including depreciation and provisions). It is the final Profit or Loss of a business.
Format of Profit and Loss Account
To Trading A/c (Gross loss transferred from trading A/c) To Salaries To Rent, rates and taxes To Office lighting & heating To Insurance To Printing and stationery To Postage and telegrams To General expenses To Telephone charges To Interest paid To Discount allowed To Bad debts To Repairs To Depreciation To Commission paid To Interest on capital To Capital A/c (profit transferred to balance sheet)
Profit and Loss Account for the period ending ………..
XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
XXX XXX XXX XXX XXX XXX
By Trading A/c (Gross profit transferred from trading A/c) By Rent Received By Commission received By Discount earned By Bad Debts recovered By Interest on drawings By Capital A/c (loss transferred to balance sheet)
XXXX XXXXX XXXXX
Meaning of Balance Sheet: The statement of assets and liabilities prepared on the last date of the trading period is known as the “Balance Sheet”. The Balance sheet is a sheet containing the balances of real and personal accounts (i.e., balances of assets and liabilities) of a business.
Important Features of Balance Sheet
A balance sheet consists of two sides, viz., (1) Left-hand side and
(2) Right-hand side. The left-hand side is called “Liabilities side”, as it contains the various liabilities. The right-hand side is called “Assets side”, as it contains the various assets. It should be noted that the two sides of the balance sheet, the left-hand side and the right-hand side, are not called “debit side” and “credit side”, because the Balance Sheet is only a statement, and not an account. A Balance Sheet is prepared only after the completion of the trading and profit and loss account, because the net profit or net loss, as shown by the trading and profit and loss account, is to be adjusted in the capital of the proprietor in the Balance Sheet. The total all the assets must be equal to the total of all the liabilities. In other words, the two sides of the Balance Sheet must agree, i.e., must balance. It is for this reason that the statement of assets and liabilities is called a balance sheet.
The Balance sheet is merely a statement, and not an account. Therefore, the words “To” and “By” are not used before the various items in the Balance Sheet. The Balance sheet is prepared as on a particular date, and not for a particular period. Therefore, it indicates the true financial position only on the particular date,
and not on any other date. As The Balance sheet is prepared as on a particular date, it should be headed “Balance Sheet as on or as at”, and not “Balance Sheet for the period ending…..”
Difference between Profit and Loss A/c and Balance Sheet
Profit And Loss Account Balance Sheet
It is an account It is an account of expenses
It is only a statement It is a statement of assets and
and incomes It is contains normal accounts or revenue items, i.e., revenue payments or expenses and revenue receipts or incomes. It show the correct net profit or loss It is prepared before the preparation of the balance sheet
liabilities It is contains capital items, i.e., capital expenditure or assets and capital receipts or liabilities. It show the true financial position It is prepared after the preparation of the profit and loss account
Format of Balance Sheet
Balance Sheet as at ………
1. Capital: Opening capital Less: Drawings Add: Interest on capital Add: Proprietor’s salary Less: Interest on drawings Add: Net Profit Less: Net loss
1. Fixed Assets: Goodwill Patents Copyrights Land and Building Plant and Machinery Vehicles Furniture and Fixtures Loose Tools 2. Long-term Investments:
XXXX XXX XXX XXX XXXX XXX XXX
2. Fixed /Long term liabilities: Long-term loans Long-term deposits 3. Current liabilities: Income received in advance Liabilities for expenses Sundry creditors Bills payables Bank Overdrafts Short-term loans
XXX XXX XXX XXX XXX XXX XXX XXX XXX
XXX XXX XXX XXX XXXX XXXX
3. Current Assets: Short-term Investments Outstanding income Prepaid Expenses Closing stock Sundry Debtors Bills Receivable Cash in hand / Bank
XXX XXX XXX XXX XXX XXX XXX