COMPONENTS OF FINANCIAL STATEMENT

Income Statement Balance Sheet Cash Flow Statement Notes to Accounts and Accounting Policies

OBJECTIVE OF FINANCIAL STATEMENTS

To provide information about the financial position, performance and cash flow of an enterprise However they do not provide all the information because 1.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

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.

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

Items relating to incomes and Expenses

Adjustments

Items relating to Assets and Liabilities

Profit and Loss Account Result: Net Profit or Loss

Double Entry Effect

Balance Sheet

Transferred to Balance Sheet

Preparation of Profit and Loss A/c

Profit and Loss A/c is a key financial statement which represents an organizations income less its expenses over a period of time and thus determines its profit.

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 the accrual basis of accounting rather than the cash basis.
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Revenues and Expenses

Revenues - gross increases in owners equity arising from business operations/delivery of goods-services to customers Expenses - decreases in owners equity that arise because goods or services are delivered to customers
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TRANSACTION
INCOME EXPENDITURE

Revenue Income

Capital Income

Revenue Expendi ture

Capital Expend iture

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P & L TRANSACTION A/c

Income (Revenue Income) Less INCOME EXPENDITURE Expenditure (Revenue Expenditure) NET PROFIT/LOSS

Revenue Income

Capital Income

Revenue Expendi ture

Capital Expend iture

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BALANCE SHEET TRANSACTION

INCOME

SOURCES OF FUNDS (Liabilities) (Capital Income) APPLICATION OF FUNDS (Assets) (Capital Expenditure)

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

BALANCE SHEET

P & L A/C

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Revenues and Expenses

Income (profit) - the excess of revenues over expenses

Revenues - Expenses = Profit

Retained earnings - additional owners equity generated by income or profits

Revenues increase owners equity. Expenses decrease owners equity.

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Format of Trading & P/L Account and Balance 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 of events over a span of time and explains the changes that have taken place between BS dates.

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Statement of Financial Position

Assets --- Assets are the resources controlled by an enterprise as a result of past events, from which future economic benefits are expected to flow to the enterprise. Liabilities Liabilities are the present obligations of the enterprise ,arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Equity Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.
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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
a

Sheet is defined as

statement of the financial position of an enterprise as at a given date, which exhibits assets, liabilities, capital, etc.

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DEFINITION: BS
Balance
a

Sheet is defined as

statement of the financial position of an enterprise as 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 the financial 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 give the corresponding amounts for the preceding financial year (Comparatives) for all the items shown in the BS.

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Balance Sheet
Asset side Items under Fixed Asset 1. Land 2. Building 3. Plant and Machinery 4. Furniture and Fixture 5. Vehicles

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Balance Sheet

1.
2.

3. 4.

Investment Investment in govt. securities Investment in shares ,debentures and bonds Investment in immovable properties Investment in the capital of partnership firms
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Balance Sheet
Current Assets, Loans, and Advances Current Assets --- Inventories --- Sundry debtors --- Cash and bank balances Loans and Advances --- Advances recoverable in cash or in kind or for value to be 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 side Share Capital --- Equity Share Capital --- Preference Share Capital Reserves and Surplus --- Capital reserves --- General reserve --- Capital redemption reserve --- Debenture redemption reserve

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Balance Sheet
Loan Funds Secured Loans -- Term Loans -- Debentures --Working capital loans Unsecured Loans -- Fixed deposits --Debentures --Security deposits

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Balance Sheet
Current Liabilities and Provisions Current Liabilities --- Sundry Creditors --- Expenses Payable --- Advances from customers --- Unclaimed dividends --- Interest accrued but not due Provisions --- Provision for taxation --- proposed dividend --- provision for contingencies

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Limitations of Balance Sheet

Balance Sheet is considered to be a static document and it reflects the position of the concern at a moment of 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 better picture to the share holders, bankers and financial institutions.

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

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