Financial Statements from Complete Records

Financial statements are the statements which are prepared to determine profitability and financial position of a business.

Components of financial statements:

1. Trading and profit and loss account
2. Balance sheet

Objectives of financial statements:

1. To determine profitability of the business.
2. To determine the financial position of the business. 

Trading Account:

Format of trading account:

Particulars	Amount	Particulars	Amount
To opening stock To purchases Less: purchase returns To direct expenses To gross profit		By closing stock By sales Less: sales returns

Important Formulaes:

• Cost of Goods Sold = opening stock + net purchase + direct expenses - closing stock
• Gross profit = Net sales - Cost of goods sold
• Adjusted Purchases = Opening stock + Net Purchases - Closing Stock
• Operating profit = gross profit + operating incomes - operating expenses 

Or 

Operating profit = net profit + non operating expenses - non operating incomes

Balance Sheet

Grouping of Assets and Liabilities - Putting together under the common heading the items of the same nature.

Eg. All the assets which are to be remained in the business for a period of more than year are placed under the head fixed assets'. For eg. furniture, building, machine etc. Similarly, all the liabilities which are payable within one year are placed under the head current liabilities'. For eg. creditors, bills payable etc.

Marshalling of Assets and Liabilities - Proper arrangement of assets and liabilities in the balance sheet.

Marshalling can be done in two ways:

1.  In order of liquidity - Assets and liabilities are recorded in the order of liquidity. The most liquid assets are written first and least liquid assets are recorded at last.  
2. In order of permanence - The assets with a higher degree of permanence are recorded first, followed by the assets with a lower degree of permanence.

Format of Balance Sheet

Liabilities	Amount	Assets	Amount
Capital Less: Drawings  Add: Net Profit  Debentures Loans Bills Payable Creditors Bank Overdraft Outstanding Expenses Income received in advance		Goodwill Land Building Machinery Furniture Debtors Stock Prepaid Expenses Cash at bank Cash in hand

Treatment of Important Adjustments:

1. Closing Stock

• Credit side of trading a/c
• Asset side of Balance Sheet

2. Prepaid Expenses

• Deducted from the concerned expense in trading or profit & loss a/c
• Asset side of Balance Sheet

3. Outstanding Expenses

• Added to the concerned expense in trading or profit & loss a/c
• Liabilities side of Balance Sheet

4. Accrued Income

• Added to the concerned income in trading or profit & loss a/c
• Asset side of Balance Sheet

5. Income Received in Advance

• Deducted from the concerned income in trading or profit & loss a/c
• Liabilities side of Balance Sheet

6. Depreciation

• Debit side of profit and loss a/c
• Deducted from the concerned asset

7. Bad Debts

• Debit side of profit and loss a/c
• Deducted from the debtors

8. Provision for doubtful debts

• Debit side of profit and loss a/c
• Deducted from the debtors

9. Provision for discount on debtors

• Debit side of profit and loss a/c
• Deducted from the debtors

10. Goods taken for personal use

• Deducted from purchases
• Added to drawings

11. Interest on capital

• Debit side of profit and loss a/c
• Added to capital

12. Manager Commission

• Debit side of profit and loss a/c
• Liabilities side of balance sheet

13. Abnormal Loss