14 FINANCIAL STATEMENTS (WITHOUT ADJUSTMENTS)

1 ACCOUNTANCYN otes221 FINANCIAL STATEMENTS (WITHOUT ADJUSTMENTS) In the previous lessons you have learnt to record the business transactions in differentbooks of accounts and their posting into the main book ledger. You have alsolearnt the balancing of accounts and preparation of trial balance. One of the importantpurposes of accounting is to find out the profit or loss of a business for a particularaccounting period and also to know its FINANCIAL position on a particular this purpose, Income Statement and Position Statement are prepared everyyear by all business organisations. Income statement is divided into two parts,which are as follows:(i)Trading Account and(ii)Profit and Loss Statement is prepared to know the earnings of a business during aparticular accounting year or the loss suffered during the year. PositionStatement, also known as Balance Sheet, is prepared to know the financialposition of a business on a particular this lesson you will learn as to how the FINANCIAL STATEMENTS are prepared tofind out the profit for an accounting year and to know its FINANCIAL position ona particular studying this lesson you will be able to: explain the meaning of FINANCIAL STATEMENTS ; explain the objectives of FINANCIAL STATEMENTS ; classify the FINANCIAL STATEMENTS into Trading Account, Profit andLoss Account and Balance Sheet and prepare Trading Account, Profit and Loss Account and - VPreparation ofFinancial StatementsOBJECTIVESACCOUNTANCY222 Notes MEANING OF FINANCIAL STATEMENTSLike a student who eagerly waits for his/her annual examination result, everybusinessman also eagerly waits to know the result of his business for a particularfinancial year.

2 The businessman also wants to know the FINANCIAL position ofhis business on a particular date. This date is normally the last date of thefinancial year for which the accounts have been prepared. The STATEMENTS ,prepared to know the result of the business and the FINANCIAL position of thebusiness, are called FINANCIAL STATEMENTS . The statement prepared for ascertaingross profit/loss is called Trading Account. The statement prepared to ascertainthe net profit is called Profit and Loss Account. Trading and Profit and LossAccount taken together is called the Income Statement. Statement prepared toknow the FINANCIAL position of the business is called the Balance Sheet orPosition OBJECTIVES OF FINANCIAL STATEMENTSF ollowing are the objectives of preparing FINANCIAL STATEMENTS :i)Ascertain the result of business activities : One of the importantobjectives of preparing FINANCIAL STATEMENTS is to ascertain the STATEMENTS provide information about the profit earned or lossincurred during a particular accounting period or )Ascertain the FINANCIAL position of business : Balance Sheet providesinformation about the FINANCIAL position of business on a particular )Correct decision making : FINANCIAL STATEMENTS are helpful in decisionmaking for the business on the basis of the information provided by financialstatements, future decisions can be taken )Judging the performance of management.

3 FINANCIAL STATEMENTS arehelpful in judging the performance of management and utilization ofresources of a business )Ascertaining the cash position of business :The cash position indicatedby the FINANCIAL STATEMENTS helps the business in planning the payment ofcash to creditors, suppliers OF FINANCIAL STATEMENTSF inancial STATEMENTS of a sole trader comprise of the following Statement(i)Trading Account and(ii)Profit and loss Statement or Balance SheetFinancial STATEMENTS (Without adjustment )MODULE - VPreparation ofFinancial StatementsACCOUNTANCYN otes223 Income StatementIncome statement is prepared to find out the profit or loss of business for a particularaccounting year. Income statement is made up of the following accounts:a)Trading Account andb)Profit and loss Accounta)Trading Account :Trading Account is prepared to find out the Gross profitearned or Gross loss suffered by the business from business activities duringan accounting year. This account is prepared in T-form.

4 Following is theproforma of a Trading Account:Trading Account of M/s XYZDr. for the year (`)(`)To Opening Stock_____ By SalesTo Purchases (i) Cash Sales_____ (i) Cash Purchases_____ (ii) Credit Sales_____ (ii) Credit Purchases_____ Total Sales_____ Total Purchases_____Less Sales Returns_____Less Purchase Returns_____Net Sales_____Net Purchases_____ By Closing Stock_____Direct Expenses :By Gross Loss transferred to To Wages_____P & L A/c (Balancing fig.)_____ To Freight/Freight Inward _____ To Carriage/Carriage Inward _ _ _ _ _ _ _ To Fuel & Power_____ To Factory Rent_____ _____ To Gross Profit transferred to P & L A/c (Balancing fig.)_____Illustration 1 From the following balances extracted from the books of M/s Luxmi & Sons, preparea Trading Account for the year ended 31st March, (`)Opening stock6,500 Purchases45,000 Sales72,000 Purchases Returns500 Sales Returns1,500 Carriage1,200 Wages4,800 Fuel & Power3,200 Closing stock8,000 FINANCIAL STATEMENTS (Without adjustment )MODULE - VPreparation ofFinancial StatementsACCOUNTANCY224 NotesSolutionTrading Account of M/s Luxmi & SonsDr.

5 For the year ended March 31, 2012Cr. ParticularsAmountParticularsAmount(`)(`) To Opening Stock6,500 By Sales72,000To Purchases45,000 Less: Returns1,50070,500 Less : Returns50044,500 By Closing Stock8,000To Carriage1,200To Wages4,800To Fuel & Power3,200To Gross Profittransferred to P & L A/c(Balancing Figure)18,30078,50078,500 Illustration 2 From the following balances extracted from the books of M/s Bhanu Bros, preparea Trading Account for the year ended 31st March, (`)Opening Stock as on ,000 Purchases1,65,000 Freight4,000 Power6,500 Custom Duty5,500 Sales80,000 Closing Stock as on 31st March, 201230,000 SolutionTrading Account of M/s Bhanu for the year ended March 31, (`)(`)To Opening Stock32,000 By Sales80,000To Purchases1,65,000 By Closing Stock30,000To Freight4,000 By Gross LossTo Power6,500transferred to P & L A/cTo Custom Duty5,500(Balancing Figure)1,03,0002,13,0002,13,000 FINANCIAL STATEMENTS (Without adjustment )MODULE - VPreparation ofFinancial StatementsACCOUNTANCYN otes225 Fill in the blanks with suitable word/words is debited to _____ Sales Sales Returns = are debited to _____ stock is shown on the _____ side of Trading Purchases Purchase Returns = _____b)Profit and Loss Account :After finding out the gross profit/ gross loss bypreparing the Trading Account, Profit and Loss Account is prepared to findout the net profit / net loss of the business during an accounting year.

6 Thisaccount is also prepared in T-form. Following is the proforma of a Profitand loss AccountProfit and loss Account of M/s ABCDr. for the year `Particulars`To Gross Loss transferredBy Gross profit transferred from Trading A/c_____ from Trading A/c_____To Salaries_____ By Commission Received_____To Office Rent_____ By Discount receivedTo Printing & Stationery_____ from creditors_____To Insurance Premium_____ By Rent Received_____To Interest Paid_____ By Interest Received_____To Freight outwards_____ By Net Loss Transferred toTo carriage outwards_____ Capital AccountTo Discount Allowed to customers_____ (Balancing Figure)_____To Postage_____To Telephone Charges_____To Office Expenses_____To Sales Expenses_____To Net Profit Transferred to Capital Account (Balancing Figure)_____Illustration 3 From the following information, prepare Profit and loss Account of M/s Sahil Brosfor the Year ending on `Gross Profit97,000 Discount allowed to customers2,000 Printing and stationery2,000 Office rent5,000 FINANCIAL STATEMENTS (Without adjustment )

7 INTEXT QUESTIONS - VPreparation ofFinancial StatementsACCOUNTANCY226 NotesRepair2,400 Insurance Premium5,100 Telephone Charges1,000 Discount received from Creditors3,000 Interest earned during the year5,000 SolutionProfit and loss Account of M/s Sahil the year ended March 31, `Particulars`To Discount allowed to customers2,000 By Gross profit transferredTo Printing and Stationery2,000 from Trading A/c97,000To Office Rent5,000 By Discount received fromTo Repairs2,400 creditors3,000To Insurance Premium5,100 By Interest earned during the year5,000To Telephone Charges1,000To Net Profit transferred to Capital Capital A/c (Balancing fig.)87,5001,05,0001,05,000 Illustration 4 From the following information, prepare Profit & Loss Account of M/s SarthakTraders for the year ending on `Gross Profit43,000 Discount allowed to customers7,000 Salaries45,000 Interest paid on loan13,000 Postage2,400 Discount received from creditors6,000 Commission received1,000 Sales expenses10,000 SolutionProfit and loss Account of M/s Sarthak the year ended March 31, `Particulars`To Discount allowed to customers7,000 By Gross profit transferredTo Salaries45,000 from Trading A/c43,000To Interest on loan13,000 By Discount received fromTo Postage2,400 Creditors6,000To Sales expenses10,000 By Commission Received1,000By Net Loss transferred to capital A/c27,40077,40077,400 FINANCIAL STATEMENTS (Without adjustment )

8 MODULE - VPreparation ofFinancial StatementsACCOUNTANCYN otes227 State whether the following STATEMENTS are True or inward is shown in Profit& Loss expenses are shown in Trading outward is shown in P&L Profit is transferred from Profit & Loss Account to Trading between Trading Account and Profit and Loss AccountThe distinction between Trading A/c and Profit & Loss A/c is as follows: Trading Account Profit and Loss AccountThis account shows the grossThis account shows the net profit or or gross loss for annet loss for an accounting direct expenses relating toAll indirect expenses relating to are shown on thebusiness are shown on the debit sidedebit side of this this direct revenue items areAll indirect revenue items are shown on the credit side ofon the credit side of this balance of this account balance of this account net profit or gross loss isprofit or net loss is transferred to thetransferred to P&L. account of the proprietor.

9 Statement or Balance SheetBalance Sheet or Position Statement is prepared to find out the FINANCIAL position ofa business on a particular date. Generally it is prepared on the last date of anaccounting year. It is prepared after preparing Trading Account and Profit &Loss Sheet has two sides. Left hand side is known as Liabilities side andright hand side is known as Assets Liabilities side is used for showing liabilities of the business. The termliabilities include Internal Liabilities and External Liabilities of the business. Internalliabilities means the amount payable by the business to its owner, while externalliabilities mean the amount payable to STATEMENTS (Without adjustment )INTEXT QUESTIONS - VPreparation ofFinancial StatementsACCOUNTANCY228 NotesClassification of Internal and External LiabilitiesInternal liabilitiesExternal of businessBank loan and other of businessExpenses payable or dueThe Assets side is used for showing the assets of the business.

10 The term assetsincludes fixed assets and current assets of the of AssetsFixed AssetsCurrent and buildingCash in &MachineryCash at of Vehicles of Preparing Balance SheetBalance sheet is prepared to achieve following objectives:i)To know the FINANCIAL position of the )To know the position of internal liabilities and external liabilities ofthe business so that timely arrangement can be made for their )To know the position of fixed assets and current )To plan activities for future on the basis of present FINANCIAL of Balance SheetBalance Sheet of M/s _____ as on _____Liabilities`Assets`Bank overdraft_____Cash in hand_____Creditors_____Cash at Bank_____Loans/Bank Loan_____Debtors_____Capital_____Stock__ ___Add : Net Profit_____Investments_____Less : Net Loss_____Furniture_____Less Drawings_____Motor Vehicles_____Plant & Machinery_____Land & Building_____Financial STATEMENTS (Without adjustment )MODULE - VPreparation ofFinancial StatementsACCOUNTANCYN otes229 Illustration 5 From the following information supplied by Mr.