Financial Statements

• 1. Profit & Loss Account- It is prepared to

ascertain the Net Profit earned or Net Loss
suffered during the year.
• It is prepared for a particular period, generally, a
year.
• 2. Balance Sheet- It shows the financial position
of the business at a given date.
• It is a statement showing Assets and Liabilities of
the business.
 Users of financial statements
• 1.Management- Since Mgt. is ultimately
responsible for the financial performance,
they must periodically compile and interpret
the statements.
• 2.Employees- to know the current and future
profitability and solvency of the company.
 Users of financial statements
• 3.Investors- A realistic estimation of the
safety of the intended investment and the
return expected to be earned as a result of
such investments can be made.
• 4.Creditors- to know the repayment capacity
and the short term liquidity of the company.
 Users of financial statements
• 5.Lenders- Banks, financial institutions
and other agencies see the profitability
and long term solvency of the business.
• 6.Government- to know taxable
income and tax thereon.
 Users of financial statements
• 7.Consumers- to draw inferences about the
long term viability of the firm.
• Legal obligations associated with guarantees,
warranties and after sales service contracts
tend to establish long term relationships
between business and customers.
 Basic Accounting Principles
• 1.Accrual Principle - Sales and profits
are taken into account despite no
money is actually received.
• 2.Matching Principle – Matching the
revenue of a particular period with cost
of that period only.
 Basic Accounting Principles
• 3.Going Concern Principle- We presume
that business concern will continue to go
on.
• 4.Principle of Conservatism- Revenues are
to be recognized only when they are
reasonably certain, and expenses are to be
recognized as soon as they are reasonably
possible .
Accounting Principles ( GAAP )
• 1.Money Measurement- A record is made only of
information that can be expressed in terms of
money.
• 2.Cost Concept- All transactions are generally
recorded at cost, and not at market value.
• 3.Going Concern Concept- A business concern is
assumed to carry on its operations forever.
 Accounting Principles ( GAAP )
• 4.Time Period- Income or loss of the business is
measured for a specified interval of time, called
the accounting period. eg. 1 year.
• 5.Consistency- Once an entity has decided on one
method of accounting, it will treat all subsequent
events of the same character in the same fashion
unless it has a sound reason to change the method.
Accounting Principles ( GAAP )
• 6.Business Entity- When an owner brings
capital into the business, the business in
turn is deemed to owe the capital to the
owner.
• 7.Matching Concept- In order to determine
the profits or losses in an accounting period,
the expenses must relate to the goods or
services sold during the period.
 Accounting Principles ( GAAP )
• 8.Conservatism- Revenues are to be recognized only
when they are reasonably certain, and expenses are to
be recognized as soon as they are reasonably possible.
• 9.Realization- It deals with the point in time at which
revenue may be deemed to be realized or when a sale
can be said to have taken place.
 Accounting Principles
• 10.Dual Concept- In business, funds can be
raised in any of the following ways:
• Additional capital
• Additional loans
• Earning Revenue
• Making profits
• Disposing some of the assets
 Accounting Principles
• 10.Dual Concept- Similarly, funds may be
put to any of the following uses:
• Purchasing of assets
• Incurring operational expenses
• Discharging earlier liabilities
• Suffering losses.
Accounting Principles ( GAAP )
• 10.Dual Concept-The sum of Sources of
Funds must equal the sum of Uses of Funds.
• All increases in liabilities and reduction in
assets represent sources of funds.
• All increases in assets and decreases in
liabilities are uses of funds.
 Accounting Principles
• Dual Concept- This is because,
whatever funds are raised by the
business, either through capital or
operations or from outsiders, must be
tied up in one or the other form of uses.
Accounting Principles ( GAAP )
• 11.Accounting Period- The period for
which the income statement is to be
prepared must be specified.
• 12.Accrual Principle- Sales and profits
are taken into account despite no money
is actually received.
 Double Entry System
• All business transactions have a two- fold
effect. Recording of both the aspects of a
transaction is called Double Entry System
of Financial Accounting.
• The system records both the debit and credit
aspects of a transaction, it is known as
Double Entry System.
 Terms in Accounting
• Debit- Increasing the debt owed to
us by others till we receive
payment\record expenditure\reduce
the debt owed to others.
• Credit- Increasing the debt owed
by us to others \record income \
reduce money owed to us as &
when we receive payment.
 Definitions
• Debtors- The money that is owed to us
by the customers to whom goods are
sold or services are supplied on credit.
• Creditors- Persons to whom business
enterprise owes money for goods or
services supplied by them.