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:

(I)

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.

(II)
(III)

(IV)

debit

(V)
(VI)
(VIII)

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

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:#

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
outside liabilities.

are together referred to as

FIXED LIABILITIES represent the companys long-term finance, and include

items on which interest is payable, such as long-term loans from financial
institutions.
CURRENT LIABILITIES represent the companys 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

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

Amount Assets

Reserves

Fixed Assets:Furniture
Loose Tools
Motor Vehicle
Plant & Machinery
Land & Building
Goodwill

Fixed liabilities:Long term loans

INVESTMENTS
Long Term Investment

Current Liabilities:Bank overdraft

Bills payable
Sundry creditors
Outstanding expenses
Unearned Income

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 31 st, xxxx
I

Sources of funds
1

Rs.

Shareholders Funds
a.

Share Capital
Authorised Capital
Issued capital

Xxx

b.

Reserves and Surplus

Xxx

XXX

Loan Funds
a.

Secured Loans

xxx

b.

Unsecured Loans

xxx

XXX
XXXX

Application of Funds
1

Fixed Assets

XXX

Investments

XXX

Current Assets, Loans and Advances

Less: Current liabilities and Provision
Net Current Assets

Miscellaneous Expenditures

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

18000
24000
6000

150000
13000
260000

62000
260000

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

Cash in hand / Bank

Cost
Marketable securities
lower of cost & Realizable value
Deposits
At cost
Prepaid Exp.
At cost
Account receivable
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.