FINAL ACCOUNTS AND

FINANCIAL STATEMENTS
 What is Financial Statement?
A financial statement may be defined as an organized collection of
accounting information in a systematic, logical and consistent
manner with the users of accounting information.

According to the Kohler, "Financial statements are those

statements which show both the performance and the financial
position.

They indicate Balance Sheets, Income statements, Fund

statements or any supporting statements or other presentation of
financial data derive from accounting records.
 FINAL ACCOUNTS
Final Accounts is the last step in the accounting process.
Trial Balance is prepared at the end of all the accounting
year to know the balances of all the accounts & to test
the arithmetic accuracy of accounts.
But the basic objective of accounting is to know about
the profit or loss during the previous year & present
financial position.

This can be known only if Trading account and Profit &

Loss account and Balance Sheet are prepared at the end
of year. These are also known as FINANCIAL
STATEMENTS which are prepared.
 From Trial Balance. Final Accounts include the
preparation of :
1) Trading and Profit & Loss account and
2) Balance Sheet
as these two statements are prepared to give the final
results of the business, both of these are collectively
called as final accounts. Accounting cycle finally ends
with these statements as shown in next slide:

Refer PDF for Performa and details of items

 Types of Financial Statement
Final accounts or financial statements can be
divided in two parts:-

1) Trading and Profit & Loss Account

2) Balance Sheet
 Trading Account
Trading account is prepared by trading concerns i.e.,
concerns which purchase and sell finished goods, to
know the gross profit or gross loss incurred by them
from buying and selling of goods during a particular
period of time.

Gross profit or gross loss is the difference between the

cost of goods sold and the proceeds of their sale. If
the sale proceeds exceed the cost of goods sold , gross
profit is made. Otherwise,gross loss is made.
Ascertainment of Cost of Goods Sold
Opening Stock .
Add: Purchases .
Less: Purchase Return .

Goods Available for Sales .

Add: Direct Expenses .

Less: Closing Stock .

Cost of Goods Sold .
Specimen Proforma of Trading Account

Dr Trading Account of .. For the year

ending... Cr Amt.
Particulars Particulars Amt
.
To Opening By Sales
Stock Less: Returns
To Purchases
By Closing Stock
Less: Returns By Gross Loss
To Direct c/d*
Expenses:
Carriage
Inward
Wages
Wages &
salaries
Fuel & power
 Import Duty
Custom Duty
Excise Duty
Consumable Store
Factory Rent, Rates,
and Taxes
Foreman/ Works Managers
Salary
Royalty on manufactured
goods
To Gross Profit c/d*
 Profit & Loss Account
For non-corporate business organisation Profit & Loss account
is second part of income statement. It is prepared to know the
net loss/profit of business during a particular period.

Every businessman has to spend on expenses other than on

manufacture or purchase of goods which are called indirect
expenses. There can be other incomes except sales.

So gross profit or loss is adjusted keeping in view these indirect

expenses and other incomes to find out net profit or net loss.
 Proforma of Profit & Loss Account
Particulars Amt Particulars Amt
To Gross Loss b/d By Gross Profit b/d
To Establishment By other expenses
Charges By Net Loss
To Administrative (transferred to capital
Charges account)
To Selling &
Distribution
expenses
To Financial
Charges
To Depreciation
& Provisions
To Abnormal
Losses
To Net Profit
(transferred to
Capital Account)
 Vertical form of P &L a/c
I : INCOME
Sales/ Services
dividend
interest
other income
II: EXPENDITURE
Cost of goods consumed
i. Opening stock
ii. Purchases
less: Closing Stock
Manufacturing expenses
Selling expenses
Salaries, wages and other employee benefits
Managerial Remuneration
Interest
Depreciation
Provision for doubtful debts
Any other expenses
III: PROFIT/ LOSS BEFORE TAX
IV: PROVISION FOR TAX
V: PROFIT AFTER TAX
 PROFIT AND LOSS APPROPRIATION
ACCOUNT.
To transfer to reserve By balance b/f from last year
To general reserve By net profit from P&L a/c
To sinking fund By transfer from reserves
To expenses of last year By transfer from reserves no
longer required
To interim dividend
To proposed dividend
To surplus carried to b/s
 Balance Sheet
Balance Sheet is a component of financial statements
which shows balances of capital, liabilities & assets.
All nominal accounts are closed by transferring these
to Trading & Profit & Loss Account. Only personal &
real accounts are left.
Balance Sheet is the final phase in accounting cycle. It
is a mirror which reflects the true position of the
assets & liabities of the business on a particular
date.
A statement of financial position of economic unit
disclosing as at a given moment of time its assets,
liabilities & ownership equities. Eric L.kohler
 SCHEDULE VI FORM OF BALANCE
SHEET/PROFIT & LOSS ACCOUNT
LIABILITIES (Rs.) ASSETS (Rs.)
SHARE CAPITAL FIXED ASSETS
RESERVES & SURPLUS INVESTMENTS
SECURED LOANS CURRENT ASSETS, LOANS &
ADVANCES
UNSECURED LOANS MISCELLANEOUS EXPENDITURE
CURRENT LIABILITIES &
PROVISIONS
CONTINGENT LIABILITIES
 Vertical Form Of Balance Sheet
I. Sources of Funds :
1. Owners' Funds
A)Capital
B)Reserves and Surplus
2. Borrowed Funds
A)Secured Loans
B)Unsecured Loans
Total Funds Available / Capital Employed
II. Application of Funds
1. Net Fixed Assets
Gross Block
Less: depreciation
Net Block
Capital Work in progress
2. Long Term Investments
3. Working Capital
Current assets
Less: current liabilities
Net Current Assets or Working Capital
Total Assets or Total Funds Employed
 Limitations Of Financial Statements
1. Mislead the user
The accuracy of financial information largely depends on how accurately financial statements are prepared. If their
preparation is wrong, the information obtained from their analysis will also be wrong which may mislead the user in making
decisions.

2. Not useful for planning

Since financial statements are prepared by using historical financial data, therefore, the information derived from such
statements may not be effective in corporate planning, if the previous situation does not prevail.

3. Qualitative aspects
Then financial statement analysis provides only quantitative information about the company's financial affairs. However, it
fails to provide qualitative information such as management labour relation, customer's satisfaction, management's skills
and so on which are also equally important for decision making.

4. Comparison not possible

The financial statements are based on historical data. Therefore comparative analysis of financial statements of different
years can not be done as inflation distorts the view presented by the statements of different years.

5. Wrong judgement
The skills used in the analysis without adequate knowledge of the subject matter may lead to negative direction . Similarly,
biased attitude of the analyst may also lead to wrong judgement and conclusion.

The limitations mentioned above about financial statement analysis make it clear that the analysis is a means to an end and
not an end to itself.
The users and analysts must understand the limitations before analyzing the financial statements of the company.
 Managerial Remuneration
Managerial remuneration is the salary paid to the
managers of the company on the Top management
level.
Example of one such post is Director of the
company.
The managerial remuneration is operated under
Companies Act, 1956.
To clear up the concept the Act also defines who is
a manager and who is a director of the company.
 Definition
Manager :
Section 2(24) of the Companies Act 1956,
defines the term manager, means an individual
who, subject to superintendence, control and
direction of Board of directors, has the
management of the whole, or substantially the
whole, of the affairs of the company, and includes
a director or any other person occupying the
position of a manager, by whatever name called,
and whether under a contract of service or not.
 Index
is divided to following section
Maximum limit one can pay to manager.
Minimum limit one can pay to manager.
Calculation of managerial remuneration.
Remuneration to Manager
Overall remuneration limit
Remuneration to Director
 Maximum and Minimum pay
Maximum pay to a manager can be 11% of the
companys profit.
It is mentioned in Section 198 of the Companies
Act 1956.
If in any financial year company has no profit or
the profit are inadequate, the company shall not
pay to its managers.
This decision was made after an amendment in
1988 to 198 (4) of the companies act 1956.
 Calculation of Managerial Remuneration
The remuneration can be broken down into
Salaries and Allowances
Monitory values of various prerequisites
Contribution to provident, superannuation, gratuity funds
Commission
Benefits
Any expenditure incurred by the company in providing rent free
accommodation, or any other benefit or annuity.
Other benefit or concessional benefit
Any expenditure in respect of any obligation paid.
Any expenditure incurred by company in effecting any insurance on
the life of the managerial.
 Remuneration
A manager can receive monthly pay or a
percentage of net profit or partly by the way
of a monthly payment and partly by the way
of specific percentage.
Total remuneration cannot exceed 5% of net
profit of the company.
The net profit is to be calculated in the
manner mentioned in section 349 and
 overall picture

CATEGORIES OF PERSONNEL MAXIMUM PERCENTAGE

Total managerial 11% and if there are no
remuneration profits or inadequate
profits Rs 75,000 to Rs
2,00,000 p.m. per
person depending on
effective capital.

All directors when there is

3%
only director
All directors when there is 1%
a manager or managing
director or whole-time
director
Whole-time
5%
director(when there is 1
such director)
Managing director(when
there is 1 such director) 5%
MD and WTD taken 10%
together or when
number of WTD or MD
is two or more than two
Manager (there is no
5%
provision of having
more than 1 manager)