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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.
(IV)
tems written on the Cr. side of the Trading Account :I) II) Sales & Sales Returns Closing Stock
Sometimes the Closing Stock is given inside the Trial Balance. In such a case, Closing Stock will not be shown in the trading a/c but will appear in the asset side of Balance Sheet only
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 :Rs. 2,10,500Discount Allowed 2,000Lighting 10,000Commission received 15,800Bad debts 720Discount (Cr.) 7,500Interest on loan 400Export duty 1,600Misc. Receipts 1,100Unproductive expenses 360Traveling expenses 5,320 Rs. 3,000 780 840 1,200 600 2,200 2,300 500 4,100 2,500
Gross Profit Trade Expenses Carriage on sales Office salaries Postage and Telegram Office rent Legal charges Audit fee Donation Sundry Expenses Selling expenses
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 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. CURREN LIABILITIES AND FIXED LIABILITIES are together referred to as outside liabilities. 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 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.
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
2 Loan Funds a. b. Secured Loans Unsecured Loans xxx xxx XXX XXXX 2 Application of Funds 1 Fixed Assets 2 Investments XXX XXX
POINTS TO BE REMEMBERED # # # # The items which appear on the debit side of trial balance should be shown either an the debit side of the Trading or Profit and Loss A/c or on the assets side of the Balance sheet. The items which appear on the credit side of trial balance should be shown either an the credit side of the Trading or Profit and Loss A/c or on the Liabilities side of the Balance sheet. The balances of Personal and Real Accounts are always shown in the Balance Sheet. If a trial balance is not given in the question, and it is not clearly stated whether a particular item is expense or income, it will be treated as expense such as Discount, Commission, Brokerages of Rent etc. The total of both sides of the Balance Sheet will always be equal.
From the following balances , prepare a Balance Sheet as on 31 st 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
VALUATION OF ASSETS
Cash in hand / Bank Marketable securities Deposits Prepaid Exp. Account receivable Cost lower of cost & Realizable value At cost At cost Full value less provision of doubtful items At cost or market value whichever is less Cost Cost less depreciation
Finished goods, WIP, Raw material Land Building, Plant & Machinery, Furniture, vehicles.