7

Reporting and Preparing

Financial Statements
 Exh.
3.1

The Accounting Period

Annual
1 2
Semiannual
1 2 3 4
Quarter
1 2 3 4 5 6 7 8 9 10 11 12

Month
Transactions and Events
Exchanges of economic consideration
between two parties.

External Transactions
occur between the Internal Transactions
organization and an occur within the
outside party. organization.
Recognizing Revenues and
Expenses
 Revenue Recognition
We have delivered the
product to our customer,
so I think we should record
the revenue earned.
Recognizing Revenues and
Expenses
 Revenue Recognition
 Matching Now that we have
recognized the revenue,
Summary let’s see what expenses
of Expenses
we incurred to
Rent Rs.1,000
Gasoline 500
generate that revenue.
Advertising 2,000
Salaries 3,000
Utilities 450
and . . . . ....
Accrual Basis Vs. Cash Basis

Accrual Basis Cash Basis

Revenues are Revenues are
recognized when recognized when
earned and expenses cash is received and
are recognized when expenses recorded
incurred. when cash is paid.
GAAP Not GAAP
Accounting
FINANCIAL STATEMENTS
 Financial Statements are organized
summary of detailed information about
the financial position and performance of
an enterprise.
 Two Basic Statements are:
 BALANCE SHEET (OR POSITION
STATEMENT)
 TRADING AND PROFIT & LOSS ACCOUNT
(OR INCOME STATEMENT)
TRADING ACCOUNT
 Trading Account is one of the financial
statements which shows the result of
buying and selling of goods / and or
services during an accounting period.
 It is prepared to know the gross profit
or gross loss during the accounting
period.
 FORMAT OF TRADING ACCOUNT
Dr. Trading Account of…………for the period ending on…… Cr.

Particulars Rs. Particulars Rs.

To Opening Stock xxxxBy Sales xxxx
To Purchases xxx Less: Sales Return xxx xxxx
Less: Purchase Return xxx xxxxBy Closing Stock xxxx
To Direct Expenses xxxxBy Abnormal Loss of Stock xxxx
To Wages and Salaries xxxxBy Gross Loss transferred to
xxxxP& L A/c xxxx
To Freight Inwards
xxxx
To Carriage Inwards
xxxx
To Gross Profit transferred to
P& L A/c xxxx

xxxxx xxxxx
PROFIT AND LOSS ACCOUNT
 It shows the net result of the
business operations during an
accounting period.
 It is prepared to ascertain the Net
Profit earned or Net Loss incurred by
the business entity as a result of
business operations during an
accounting period.
 FORMAT OF PROFIT & LOSSACCOUNT
Dr. Profit & Loss Account of…………for the period ending on…… Cr.

Particulars Rs. Particulars Rs.

To Gross Loss b/d xxxxBy Gross Profit b/d xxxx
To Salaries & Wages xxxxBy Interest Earned xxxx
To Rent, Rates & Taxes xxxxBy Commission Earned xxxx
To Fire Insurance Premium xxxxBy Rent Earned xxxx
To Repairs & Maintenance xxxxBy Profit on sale of fixed assets
To Depreciation xxxxBy Income from Investments xxxx
To Audit Fees xxxxBy Sale of Scrap
To Bank Charges xxxxBy Miscellaneous Incomes
To Legal Charges xxxxBy Net Loss transferred to Capital Account
To Discount Allowed xxxx
To Carriage Outwards xxxx
To Commission to Salesman xxxx
To Sales Promotion Expenses xxxx
To Traveling Expenses xxxx
To Advertising xxxx
To Bad Debts xxxx
To Net Profit transferred to Capital Account
xxxx

xxxxx xxxxx
BALANCE SHEET

 A Balance Sheet is a statement of

assets and liabilities of an enterprise
at a given date.
 It is called a Balance Sheet because it
is a sheet of those ledger balances
which have not been closed till the
preparation of the Trading and P&L
A/c.
CHARACTERISTICS OF BALANCE
SHEET
 It is a statement NOT AN ACCOUNT. It has no
Debit and Credit side. The headings of two
sides are LIABILITIES and ASSETS.
 is a A Balance Sheet is prepared at a particular
point of time and not for a particular period.
 A Balance Sheet summary of balances of those
ledger accounts which have not been closed by
transferring to Trading and Profit and Loss A/c.
 A Balance Sheet shows the nature and value of
assets and the nature and the amount of
liabilities at a given date.
Need for the Preparation of Balance
Sheet
 To ascertain the nature and value of
assets of a business.
 To ascertain the nature and amount
of liabilities of a business.
 To find out the financial solvency of
an enterprise. An enterprise is
considered to be a solvent if its
exceed its external liabilities.
ASSETS AND LIABILITIES
 ASSETS :refers to tangible objects or intangible rights
owned by an enterprise and carrying probable future
benefits. Following items are included in the Assets:
 Fixed Assets
 Investments
 Current Assets
 LIABILITIES: refers to financial obligations of an
enterprise other than owner’s funds. Following items
are included in liabilities:
 Capital
 Long-term Liability
 Current Liability
Contingent Asset & Contingent
Liability
 Contingent Asset: An asset the existence, value and
ownership of which depend upon the occurrence or
non-occurrence of a specific event or upon the
performance or non-performance of a specified act;
contrasts with contingent liability, often growing out
of such liability.
 Contingent Liability: A contingent liability is one which
is not an actual liability but which will become one on
the happening of some event which is uncertain.
Contingent Liability has two characteristics:
uncertainty as to whether the amount will be payable
at all and uncertainty about the amount involved.
Grouping and Marshalling of Assets
and Liabilities
 Grouping means putting together
items of a similar nature under a
common heading.
 Marshalling refers to the order in
which the various assets and
liabilities are shown in the Balance
Sheet.
 Balance Sheet in the Order of Permanence
Balance Sheet of………….
Liabilities Rs.
As Assets
at……………… Rs.
Capital: Fixed Assets:
Opening Balance xxxx Goodwill xxxx
Land xxxx
Add: Net Profit xxxx Building xxxx
(Less: Net Loss) xxxx Plant & Machinery xxxx
xxxx xxxx Furniture & Fixture xxxx
Less: Drawings xxxx Investments xxxx
Long-term Liabilities xxxxCurrent Assets:
Loan Closing Stock xxxx
Current Liabilities: xxxx Accrued Income xxxx
Income received in advance xxxx Prepaid Expenses xxxx
Sundry Creditors xxxx Sundry Debtors xxxx
Outstanding Expenses xxxx Bills Receivable xxxx
Bills Payable xxxx Cash at Bank xxxx
Bank Overdraft Cash in Hand xxxx

xxxx xxxx
 ILLUSTRATION 1:
The following is the Trial Balance of Shri Ram as at 31st March, 2008:

Particulars Dr.(Rs.) Cr. (Rs.)

Land and Building 1,42,500
Plant & Machinery 42,500
Furniture & Fixture 47,500
Motor Vehicles 47,500
Stock (1.4.2007) 75,000
Purchases / Sales 5,25,000 6,30,000
Returns 10,000 5,000
Carriage Inward 1,000
Carriage Outward 2,000
Wages & Salaries 4,000
Salaries & Wages 20,000
Discount 2,000 1,000
Commission 1,500 2,000
Interest 2,500 3,000
Rent, Rates & Taxes 3,000
Repairs 600
 ILLUSTRATION 1 contd……………
The following is the Trial Balance of Shri Ram as at 31st March, 2008:

Particulars Dr.(Rs.) Cr. (Rs.)

Insurance 3,600
Printing & Stationery 600
Water & Electricity 1,200
Postage & Telegrams 500
Traveling Expenses 1,600
Conveyance Charges 1,200
Entertainment Expenses 1,200
Staff Welfare Expenses 1,200
Sales Promotion Expenses 2,400
Bad Debts 1,000
Depreciation 20,000
Miscellaneous Expenses / Incomes 1,000 1,500
Debtors / Creditors 2,05,000 50,000
Bills Receivables / Bills Payables 10,000 1,600
12% Investments ( purchased on 1.10.2007) 50,000
 ILLUSTRATION 1 contd……………
The following is the Trial Balance of Shri Ram as at 31st March, 2008:

Particulars Dr.(Rs.) Cr. (Rs.)

Loan from Bank (long-term) 54,000
Cash in Hand 5,000
Cash at Bank 10,000
Drawings 10,000
Sales Tax Collected 4,000
Capital Account 5,00,000

12,52,100 12,52,100

Additional Information : Closing Stock as on 31.03.2008 was

Rs.42,000/-
Required: Prepare the Trading & Profit & Loss A/c for the year
ending on 31st March, 2008 and Balance Sheet as on that date.