Preparation of Financial Statmenet

8/4/2019 Preparation of Financial Statmenet

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COMPONENTS OFFINANCIAL STATEMENT

Income Statement

Balance Sheet

Cash Flow Statement Notes to Accounts and Accounting

Policies


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OBJECTIVE OF FINANCIALSTATEMENTS

To provide information about the financial position,performance and cash flow of an enterprise

However they do not provide all the information because1.They largely portray the financial effects of past events

2.They do not provide information of non-financial nature Financial Position

Economic Resources

Financial Structure

Liquidity and solvency

Performance

Cash Flows


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Introduction

Annual Report Financial Statement Balance Sheet

Profit & Loss Account

Balance Sheet is a position statement.

P&L A/c is a flow statement.

Companies Act: A Balance Sheet as on the last day of the

financial year

A Profit & Loss Account for the financial year.


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Linkage Between Trial Balance, Profit &Loss Account and Balance Sheet

Adjustments

Items relating toAssets andLiabilities

Items relating toincomes and

Expenses

Double Entry Effect Balance Sheet

Result:

Net Profit or Loss

Transferred toBalance Sheet

Trial Balance

Profit and LossAccount


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Preparation of Profit and Loss A/c

Profit and Loss A/c is a key financial statement whichrepresents an organizations income less its

expenses over a period of time and thus determinesits profit.


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P&L A/c is also called Income Statement. Income is calculated as the difference

between revenues and expenses. Revenues: from operations

Expenses: specific product/service/period

Accountants have agreed to use theaccrual basis of accounting rather than thecash basis.


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Revenues and Expenses

Revenues - gross increases inowners equity arising from

business operations/delivery ofgoods-services to customers

Expenses - decreases in owners equity

that arise because goods or services aredelivered to customers


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TRANSACTION

INCOME EXPENDITURE

Revenue

Income

Capital

Income

Revenue

Expendi

ture

Capital

Expend

iture


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TRANSACTION

INCOME EXPENDITURE

Revenue

Income

Capital

Income

Revenue

Expendi

ture

Capital

Expend

iture

P & L A/cIncome (Revenue Income)LessExpenditure (Revenue Expenditure)NET PROFIT/LOSS


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TRANSACTION

INCOME EXPENDITURE

Revenue

Income

Capital

IncomeRevenue

Expendi

ture

Capital

Expend

iture

BALANCE SHEETSOURCES OF FUNDS (Liabilities)

(Capital Income)

APPLICATION OF FUNDS (Assets)

(Capital Expenditure)


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TRANSACTION

INCOME EXPENDITURE

Revenue

Income

Capital

Income

Revenue

Expendi

ture

Capital

Expend

iture

BALANCE

SHEETP & L A/C


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Revenues and Expenses

Income (profit) - the excess of revenuesover expenses

Revenues - Expenses = Profit

Retained earnings - additional ownersequity generated by income or profits

Revenues increase owners equity. Expenses decrease owners equity.


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Format of Trading & P/L Account andBalance Sheet
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THE DUET: BS & P&L

BS provides a snapshot of an entitys

financial position at an instant in time.

The P&L A/c provides a moving picture ofevents over a span of time and explainsthe changes that have taken place

between BS dates.


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Statement of Financial Position

Assets --- Assets are the resources controlled byan enterprise as a result of past events, fromwhich future economic benefits are expected toflow to the enterprise.

Liabilities Liabilities are the present obligationsof the enterprise ,arising from past events, thesettlement of which is expected to result in anoutflow of resources embodying economicbenefits.

Equity Equity is the residual interest in theassets of the enterprise after deducting all itsliabilities.


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BALANCE SHEET

BS is a position statement.

BS describes the financial position of assets & liabilities

of the firm

as on a particular date


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DEFINITION: BS

Balance Sheet is defined as

a statement of the financial position

of an enterpriseas at a given date, which exhibits

assets, liabilities, capital, etc.


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DEFINITION: BS

Balance Sheet is defined as

a statement of the financial position

of an enterpriseas at a given date, which exhibits

assets, liabilities, capital, etc.


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WHY BS ?

The legal rules (Companies Act)

A Balance Sheet as on the last day of thefinancial year

A Profit & Loss Account for the financial year.

BS should reflect true and fair view.


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LOOKS/FORM OF BS

1. HORIZONTAL

2. VERTICAL

Except in the first BS, it is required to givethe corresponding amounts for thepreceding financial year (Comparatives)

for all the items shown in the BS.
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Balance Sheet

Asset side

Items under Fixed Asset

1. Land2. Building

3. Plant and Machinery

4. Furniture and Fixture5. Vehicles


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Balance Sheet

Investment

1. Investment in govt. securities

2. Investment in shares ,debentures andbonds

3. Investment in immovable properties

4. Investment in the capital of partnershipfirms


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Balance Sheet

Current Assets, Loans, and AdvancesCurrent Assets

--- Inventories--- Sundry debtors

--- Cash and bank balancesLoans and Advances

--- Advances recoverable in cash or in kind or for value tobe received

---Advance income tax--- Advance deposit of sales tax and excise--- Inter-corporate deposits


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BALANCE SHEET

Miscellaneous Expenditure

Debit balance in Profit and Los account


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Balance Sheet

Liabilities sideShare Capital--- Equity Share Capital

--- Preference Share CapitalReserves and Surplus--- Capital reserves--- General reserve

--- Capital redemption reserve--- Debenture redemption reserve


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Balance Sheet

Loan FundsSecured Loans-- Term Loans

-- Debentures--Working capital loansUnsecured Loans-- Fixed deposits

--Debentures--Security deposits


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Balance Sheet

Current Liabilities and ProvisionsCurrent Liabilities--- Sundry Creditors--- Expenses Payable

--- Advances from customers--- Unclaimed dividends--- Interest accrued but not dueProvisions--- Provision for taxation--- proposed dividend--- provision for contingencies


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Limitations of Balance Sheet

Balance Sheet is considered to be a static documentand it reflects the position of the concern at a momentof time.

Balance Sheet is not a valuation statement. The

values shown in it are not real values of assets.


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Limitations of Balance Sheet

Window-dressing of the Balance Sheets gives a betterpicture to the share holders, bankers and financialinstitutions.

Window-dressing is accomplished in general ways

by not making adequate provisions for expenses and potential

losses,by taking into account income even before its actual accrual,


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Additional Adjustments

Outstanding expenses

Outstanding (accrued) Incomes

Bad debts and provisions

Depreciation

Goods withdrawn for personal use

Goods distributed as free sample

Expenses paid in advance

Incomes received in advance


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Additional Adjustments

Profits or loss on sale of fixed assets

Preparation of Financial Statmenet

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