Grand Finale

Financial Statements

RAHUL JAIN(Striving for excellence)BCOM (H), MBA, FCS

Learning Objective

To prepare Financial Statements

Diamond Rules• Credit The nature of an action to an account to indicate an increase

(liabilities, equity, and revenue) or decrease (assets, expenses, and dividends);

Remember the CLIC rule –Credit all Increase in Liabilities, Income and Capital

• Debit The nature of an action to an account to indicate an increase

(assets, expenses, and dividends) or decrease (liabilities, equity, and revenue);

Remember the DEAD rule- Debit All Increase in Expenses, Assets and Dividend

The Financial Statements are designed to measure different aspects The Financial Statements are designed to measure different aspects of the businessof the business

• The Balance SheetThe Balance Sheet Is a picture of the tree (fruit, branches, trunk & roots) at a certain point in time. It includes assets (inventory of goods and producing assets) and financing sources (equity, debt and reinvestments from net income) of the business.

• The Income StatementThe Income Statement Accounts for all activities involved in the operation of the business (growing and selling the fruit) over a period of time. It contains a list of all operating expenses and revenues of the business.

•

Usefulness of Income Statement

1. Evaluate the past performance of the enterprise.

2. Provide a basis for predicting future performance.

3. Help assess the risk or uncertainty of achieving future cash flows.

6

Limitations of the Income Statement

1. Items that cannot be measured reliably are not reported in the income statement.

2. Income numbers are affected by the accounting methods employed.

3. Income measurement involves judgment.

7

Direct Costs

• These are costs which are directly related to the manufacturing or operations of the organization. For example:– Wages, Royalty, Gas, Electricity, Packing – Carriage inwards, Water, Fuel– Custom duty (Import/Export duty)– Factory overheads – Job work charges

Income statement

Part-I -Trading Account

The trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year. The net result is Gross Profit or Gross Loss

Trading A/cTrading A/c

ParticularsParticulars Dr.Dr. ParticularsParticulars Cr.Cr.

To Opening StockTo Opening Stock 65,59065,590 By salesBy sales 550,900550,900

To Purchases 466800To Purchases 466800

To Direct Cost + 50,310 To Direct Cost + 50,310

5,17,1105,17,110

By closing stock By closing stock 55,11055,110

To Gross profit c/dTo Gross profit c/d 32,31032,310

6,15,0106,15,010 6,15,0106,15,010

Income statement – Part IIProfit and Loss account

Show whether a business has made a PROFIT or LOSS over a financial year.

All the indirect expenses are deducted to arrive at Net Profit or Net Loss

The net result is Net Profit or Net Loss

Indirect Costs

• This will include following:– Salary, Interest– Trade expenses, Printing– Advertising, Depreciation– Bad debts– Discount, Insurance– General Expenses– Repairing, Travel Expenses

Profit & Loss A/cProfit & Loss A/c

To salariesTo salaries 11,01011,010 By gross profit b/dBy gross profit b/d 32,31032,310

To RentTo Rent 2,2502,250 By DiscountBy Discount 11,25011,250

To General expenseTo General expense 17,47017,470 By Commission receivedBy Commission received 27,99027,990

To Bad debtsTo Bad debts 11,89011,890 By Profit on consignment By Profit on consignment to A &co.to A &co.

19,08019,080

To AdvertisementTo Advertisement 7,5007,500

To int. on loanTo int. on loan 3,0003,000

To Net profit c/dTo Net profit c/d 37,51037,510

90,63090,630 90,63090,630

Assets Assets

•Current assets• Cash• Bills receivables• Accounts receivable• Inventory• Prepaid expenses• Other Current Assets

• Fixed Assets• Building• Land• Machinery

• Long term Investments

• Intangible assets

LiabilitiesLiabilities

•Current liabilities• Bills payable• Creditors• Expenses Outstanding

• Long-term liabilities• Loan• Bonds payables

EquityEquity

•Capital

• Retained earnings

Balance Sheet ClassificationsBalance Sheet Classifications

BALANCE SHEET AS ON 31ST DECEMBER 1995

LIABILITIES LIABILITIES AMOUNTAMOUNT ASSETSASSETS AMOUNTAMOUNT

CAPITAL 119990CAPITAL 119990

-Drawings 19170-Drawings 19170

+Net Profit 37510+Net Profit 37510

CREDITORSCREDITORS

BILLS PAYABLEBILLS PAYABLE

LOANLOAN

138330138330

195070195070

5409054090

7500075000

500000500000

BILLS BILLS RECEIVABLERECEIVABLE

DEBTORSDEBTORS

CASHCASH

BANKBANK

STOCKSTOCK

130140130140

261580261580

960960

5221052210

5511055110

500000500000