Financial Statements – II
1. Introduction
Financial Statements II focuses on the preparation of financial statements for sole proprietors and understanding their importance. This chapter builds upon the concepts covered in the first chapter, emphasizing the practical application of creating comprehensive financial records.
2. Trading Account
Purpose:
- To ascertain the gross profit or loss of a business for a specific accounting period.
- Gross Profit = Sales – Cost of Goods Sold (COGS).
Structure:
- Debit Side: Opening stock, purchases, direct expenses.
- Credit Side: Sales, closing stock.
Format of Trading Account:
Trading Account for the year ended [Date]
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Particulars | Amount (₹)
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To Opening Stock |
To Purchases |
Less: Purchase Returns |
To Direct Expenses:
- Wages |
- Carriage Inwards |
- Freight |
To Gross Profit c/d |
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Total (A) |
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By Sales |
Less: Sales Returns |
By Closing Stock |
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Total (B) |
---------------------------------------------------Gross Profit/Loss:
- If Total (B) > Total (A): Gross Profit.
- If Total (A) > Total (B): Gross Loss.
3. Profit and Loss Account
Purpose:
- To ascertain the net profit or loss after accounting for all operating and non-operating expenses and incomes.
Structure:
- Debit Side: Indirect expenses (e.g., salaries, rent, depreciation).
- Credit Side: Gross profit (from Trading Account), indirect incomes.
Format of Profit and Loss Account:
Profit and Loss Account for the year ended [Date]
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Particulars | Amount (₹)
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To Gross Loss b/d |
To Salaries |
To Rent |
To Depreciation |
To Other Indirect Expenses |
To Net Profit c/d |
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Total (A) |
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By Gross Profit b/d |
By Other Indirect Incomes |
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Total (B) |
---------------------------------------------------Net Profit/Loss:
- If Total (B) > Total (A): Net Profit.
- If Total (A) > Total (B): Net Loss.
4. Balance Sheet
Purpose:
- To provide a snapshot of the financial position of a business at a specific point in time.
- Includes assets, liabilities, and owner’s equity.
Structure:
- Assets: Non-current and current assets.
- Liabilities: Non-current and current liabilities.
- Equity: Owner’s capital and reserves.
Format of Balance Sheet:
Balance Sheet as at [Date]
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Particulars | Amount (₹)
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I. EQUITY AND LIABILITIES
1. Owners' Funds
a) Capital |
b) Reserves and Surplus |
2. Non-Current Liabilities
a) Long-term Borrowings |
3. Current Liabilities
a) Short-term Borrowings |
b) Trade Payables |
c) Other Current Liabilities |
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Total Equity and Liabilities |
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II. ASSETS
1. Non-Current Assets
a) Fixed Assets |
b) Long-term Investments |
2. Current Assets
a) Inventories |
b) Trade Receivables |
c) Cash and Cash Equivalents |
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Total Assets |
---------------------------------------------------5. Adjustments in Financial Statements
Common Adjustments:
- Closing Stock: Included in Trading Account and shown in Balance Sheet.
- Outstanding Expenses: Added to related expenses and shown as current liabilities.
- Prepaid Expenses: Deducted from related expenses and shown as current assets.
- Accrued Income: Added to related income and shown as current assets.
- Income Received in Advance: Deducted from related income and shown as current liabilities.
- Depreciation: Charged to Profit and Loss Account and deducted from related fixed assets.
Impact on Financial Statements:
- Adjustments ensure that financial statements reflect the true financial position and performance of the business.
- Accurate adjustments help in making informed decisions by stakeholders.
6. Closing Entries
Purpose:
- To close temporary accounts (revenues and expenses) and transfer their balances to the permanent accounts (capital).
Steps:
- Transfer balances of all revenue accounts to Trading/Profit and Loss Account.
- Transfer balances of all expense accounts to Trading/Profit and Loss Account.
- Transfer net profit or loss to the capital account.
Example:
1. Transfer of Revenue Accounts:
Sales A/C Dr
To Trading A/C
2. Transfer of Expense Accounts:
Trading A/C Dr
To Purchases A/C
To Wages A/C
3. Transfer of Net Profit:
Profit and Loss A/C Dr
To Capital A/CBy following these steps and understanding the formats and adjustments, students can prepare accurate financial statements for sole proprietorships and other business entities.
