Introduction To Financial
Statements
Financial Statement
• Financial Statements are the statements
which show the financial performance and
financial position of the business. It includes
Trading Account, Profit and Loss Account and
Balance Sheet.
• Trading Account- Trading Account shows gross profit
earned or gross loss incurred. It is credited with sales, other
direct incomes and closing stock. It is debited by direct
expenses, i.e., opening stock, purchases, carriage inwards,
etc.
• Profit and Loss Account- Profit and Loss Account shows net
profit earned or net loss incurred. It is credited with gross
profit and other incomes and debited with indirect
expenses. The difference between the totals of two sides is
either net profit or net loss.
• Balance Sheet- Balance Sheet shows the financial position
of the business. It is a statement to which balances of
assets, liabilities and capital accounts are transferred.
Expenditure
• Capital Expenditure- Capital Expenditure is that
expenditure which gives benefit of enduring nature,
i.e., the benefit of which extends to a period or periods
beyond the accounting period
• Revenue Expenditure- Revenue Expenditure is that
expenditure the benefit of which is exhausted within
the accounting period.
• Deferred Revenue Expenditure - Deferred Revenue
Expenditure is expense or loss incurred by the firm
which are written off in more than one accounting
period. They are categorised as Fictitious Assets.
Receipts
• Capital Receipts- Capital Receipts are those
receipts which are not received in the normal
course of business, such as capital introduced,
loan received, etc.
• Revenue Receipts- Revenue Receipts are
those receipts which are received in the
normal course of business, such as revenue
from sale of goods and services.
• Grouping- Grouping means placing items of
one nature under a common head.
• Marshalling- Marshalling is arranging the
assets and liabilities in a particular order, i.e in
order of liquidity or permanance.
• Contingent Liability- Contingent Liability is a
liability that becomes payable on the
happening of an event and not otherwise
Adjustements
• Adjusted Entry- It is an entry passed in the books of
accounts to give effect to transactions that should have
been recorded in the books of accounts but are not
recorded.
• Closing Stock- It is the value of stock in hand at the end
of the accounting year. It is valued at cost or net
realisable value (market value) whichever is less.
• Outstanding Expenses- They are expenses incurred
during the year benefit of which is consumed or
exhausted in the same year but have not been paid.
For example, salary payable for the month of March is
provided not being paid.
• Prepaid Unexpired Expenses- They are the expenses
that have been paid but the benefit of which is not
consumed or exhausted during the year.
• Accrued Income- It is the income which has been
earned but not received.
• Income Receive in advance or unearned income- It is
the income which has not been earned but received
during the accounting year.
• Depreciation- It is the fall in value of fixed asset due to
usage, afflux of time, obsolescence or accident.
• Bad Debts- It is the debt that has become
irrecoverable.
• Bad Debts Recovered- It is the debt which had been
earlier written off as bad debt and has been recovered.
• Doubtful Debts- Debts which are doubtful of recovery,
i.e., recovery is not certain.
• Provision for doubtful Debts;- It is the amount set
aside out of present debts to meet bad debts in future.
• Provision for doubtful Debtors- It is the amount set
aside out of present debts to allow discount to debtors
in future.
Classification of Liabilities
• Non-Current Liabilities: These liabilities are those liabilities
which are not payable by the business in the next year.
They mainly include long-term loans, borrowings or
debentures, etc. Funds from this source are used for
acquiring fixed assets.
• Current Liabilities: These liabilities are payable by the
business within a year. Examples are trade creditors, bills
payable, expenses outstanding, bank overdraft, etc.
• Owner's Funds: The amount owing to the proprietors as
capital is a class by itself. It includes undistributed profits
and reserves besides capital. It is equal to the net assets of
the business and is defined as the difference between
assets and liabilities.
• Contingent Liabilities: Contingent Liability is a liability that becomes
payable on the happening of an event. In case, the event does not
happen, no amount is payable. Such liabilities are not accounted
and are not shown in the Balance Sheet; they are disclosed by way
of a note. Examples of contingent liabilities are:
• 1. Liabilities in Respect of Bills Discounted: If the firm got its bills
receivable discounted with bank, the primary liability will be that of
the acceptor. If the acceptor does not pay, then it becomes firm's
liability.
• 2. Guarantee for Loan: If the firm has stood surety for a loan, it will
be liable to pay the amount if the other person fails to meet his
obligation.
• Disputed Claims: If some other party has lodged a claim against the
firm, the firm will be liable to pay if the claim succeeds.
INCOME STATEMENT
• Income Statement is a summary of accounts that affects
the profit or loss of an enterprise. Many accounts shown in
the Trial Balance relate to expenditure or income. These
accounts either increase or decrease the profit. Accounts
that increase the profit are shown on one (credit) side
while accounts that decrease the profit, i.e., losses and
expenses are shown on the other (debit) side. The
statement so prepared is known as an Income Statement.
An Income Statement has two parts, namely,
• 1. Trading Account: It shows gross profit or gross loss for
the accounting period; and
• 3. Profit and Loss Account: It shows net profit or net loss for
the accounting period.
METHODS OF PRESENTATION OF
FINANCIAL STATEMENTS
• Horizontal Form: Under this form of
presentation, the financial statements are
presented in "T" form, which we have already
discussed in this Chapter. The final accounts in
the above illustrations have been prepared in
horizontal form.
• Vertical Form: Under this form of presentation,
the financial statements are presented in a single
column statement in a purposeful sequence.