Preparation Of Financial Statements

Now everything is set ready for the preparation of financial statements for the accounting period and as of the last day of the accounting period. Generally, agreed accounting principles (GAAP) require that three such reports be prepared:

1. A Trading Account

2. A profit and loss account (or) income statement

3. A Balance Sheet

4. A fund flow statement

Account: a statement wherein information relating to all items are accumulated.

Debit: signifies an increase in asset accounts, a decrease in liability accounts and a decrease in owners’ equity accounts.

Credit: signifies a decrease in asset accounts, an increase in liability accounts and an increase in owners’ equity accounts.

Ledger: a set of accounts of a specific business enterprise.

Journal: a book of prime entry.

Trial Balance: a list of balances of accounts to ensure arithmetical accuracy.

Closing Entries: entries passed to transfer the revenue accounts to profit and loss a/c.

Adjustment Entries: entries passed for transactions which are not recorded but which affect the financial position and operating results of the business.

Objectives Finacial Account

Learning Objectives

After reading this lesson the reader should be able to:

1. Understand the Basic Ideas of Income and Expense

2. Prepare a Profit and Loss Account/Income Statement in the Proper Format

3. Understand the Basic Ideas About a Balance Sheet

4. Classify the Different Assets and Liabilities

5. Prepare a Balance Sheet in the Proper Format

Trading Account Format

Particular	Amount	Particular	Amount
To opening stock To purchase XXX -Purchase XXX Wages Paid (Carriage on purchase/ Carriage inward) Fright on purchase Custom and insurance Factory Rent, Tax, and Exp Gas, Water, and Fuel	XXX XXX XXX XXX XXX XXX XXX XXX	Sale XXX -Sale Return XXX A good loss by fire Goods lost by theft Goods distributed as a free sample Closing Stock Gross loss (Transfer to P & L A/C)	XXX XXX XXX XXX XXX XXX XXX

PROFIT AND LOSS AND BALANCE SHEET

Particular	Amount	Particular	Amount
To Gross Profit (Transfer from Trading Account) A)Any loss:- To depreciation To loss by fire (Actual) To loss on sale of any Asset B)Office / Administrative Exp:- To Salary To Staff employees To Bonus to staff/Employees To Contribution to provident fund To postage / Telegram Telephone To printing and stationery To Salary and Wages To Audit Fees To Bank Charges/ Bank commission To Director Fees To Interest on Bank loan To Bank Overdraft To Interest on Debentures To General expenses To office expenses To Insurance To Repaires Maintains To Local Tax Micelinious exp C)Selling And Distribution Expenses:- To Salary to the Salesman To Commission to the salesman To Advertisement/ publicity To Showroom Expenses To Godown Expenses To Sales Tax (Vat/Gst) To Packing Expenses To Distribution Expenses To Carriage outward (Carriage on sale) Discount Paid To Bad debts (Trial Balance Dr Given) XXX +New Bad Debts(ADJ) X +New R.D.D(ADJ) XXX -Old R.D.D(Trial Balance credit side gave) XXX D) Other:- To Written of Goodwill To Written of preliminary Exp Balance sheet Liability A)Authorized Share Capital:- a)Received Capital a)Equity Share Capital c)Preference Share Capital B)Reserve and Surplus Capital:- a)Capital Reserve or Fund b)Capital redemption Fund or reserve c)General Reserve d)Dividend Equalization fund e)Any other Reserve f)Shares Premium Account g)Debenture Redemption Fund Reserve Account h)Investment Fluctuation fund i)Credit-balance of profit and loss appropriation account j)proposed k)Sinking Fund C) Secured Loan:- a)Debentures b)Loan for Advance c)Loan and Advance From Bank Subsidiaries d)Asset Mortage on a personal guaranty c)Any other Secured loan and Advance D)Unsecured Loan:- a)Loan from Public b)Deposit From Public c)Short Turm Loan and Advance from Bank d)Bank Overdraft E) Current Liability:- a)Sundry Creditors (accounts payable) b)Bill payable c)Outstanding Expenses (payable / unpaid/ not paid Exp) d)Advance Income e)Tax Provision F)Unclaimed Dividend:- G) Proposed Dividend:- H) Provident Fund:- I) Staff Saving Deposit J)Proposed liability .labour Bouns .Dispute compensation	XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX	By Gross Profit (Transfer from a trading account) By Rent Received By Interest Received By Dividend Received By Discount Received By Commission Received By Profit and sales of any asset By Share Transfer Fees By Net loss (Transfer to p and l appropriation A/c) Assets A)Fixed Asset:- a)Goodwill b)land c)Building d)Plant and Machinery e)Motor Car and Vehicle f)Furniture and Fixture g)Patents/Trademark design and Copyright h)Leasehold property i)livestock j)Freehold Property B)Investment:- a)Government Security b)Investment c)Shares d)Investment in bonds e)Shares of Subsidiary and all other investment f)Immovable Property C)Current Asset:- a)Cash in hand b)Cash at Bank c)Closing Stock(Stock in Trade) d)Work in Progress e)Sundry Debtors(Account Receivable) f)Outstanding Income (Receivable Income) g)Prepaid / Advance Expenses h)loose tools i)Stock and Spare Parts D)Loan and Advance:- a)loan given to other company b) Advance / Prepaid Tax c)Bill Receivable Advance to suppliers d)Loan and advance to Subsidiary company e)Prepaid Insurance f)Bill of Exchange E)Micelinious Expenses a)Preliminary Expenses b)Discount Allowed on an issue of shares F) Discount Allowed G)Development Expenses non Adjustment H)Expenses Including Commissions or writing on subscription on share and debentures I) Profit and Loss Appropriation Accounts	XXX XXX XXX XXX XXX XX XXX XXX XXX XXX XXX

Proforma Of A Multiple-Step Income Statement

Gross Sales

Less: Sales Returns

Net Sales

Less: Cost Of Goods Sold

Raw Materials Cost

Opening Stock Of Raw Material

Add Purchase Of Raw Material

Freight

Raw Materials Available

Less Closing Stock Of Raw Material

Raw Materials Consumed

Direct Labour Cost

Manufacturing Expenses

Total Production Cost

Add Opening Work-In-Progress

Total

Less Closing Work-In-Progress

Xxx

Cost Of Goods Manufactured

Add Opening Finished Goods

Cost Of Goods Available For Sale

Less Closing Finished Goods

Cost Of Goods Sold

Gross Profit

Less Operating Expenses

Administrative Expenses

Selling And Distribution Expenses

Operating Profit

Add Non-Operating Income

(Such As Dividend Received

Profit On Sale Of Assets Etc.)

Less Non-Operating Expenses

(Such As Discount On Issue Of Shares

Written Off, Loss On Sale Of Assets, Etc.)

Profit (Or) Earnings Before Interest & Tax (Ebit)

Less Interest

Profit (Or) Earnings Before Tax (Ebt)

Less Provision For Income-Tax

Net Profit (Or) Earnings After Tax (Eat)

Earnings Per Share Of Common Stock

Xxx

Sales Revenue:

An income statement often reports several separate items in the sales revenue section, the net of which is the net sales figure. Gross sales are the total invoice price of the goods sold or services rendered during the period. It should not include sales taxes or excise duties that may be charged to the customers. Such taxes are not revenues but rather represent collections that the business makes on behalf of the government and are liabilities to the government until paid. Similarly, postage, freight or other items billed to the customers at cost are not revenues. These items do not appear in the sales figure but instead are an offset to the costs the company incurs for them. Sales returns and allowances represent the sales values of goods that were returned by customers or allowance made to customers because the goods were defective. The amount can be subtracted from the sales figure directly without showing it as a separate item on the income statement. But it is always better to show them separately.

Miscellaneous Or Secondary Sources Of Revenues:

These are revenues earned from activities not associated with the sale of the enterprise’s goods and services. Interest or dividends earned on marketable securities, royalties, rents, and gains on disposal of assets are examples of this type of revenues

Cost Of Goods Sold:

when income is increased by the sale value of goods or services sold, it is also decreased by the cost of these goods or services. The cost of goods or services sold is called the cost of sales. In manufacturing firms and retailing business, it is often called the cost of goods sold. The complexity of calculation of the cost of goods sold varies depending upon the nature of the business. In the case of a trading concern which deals in commodities, it is very simple to calculate the cost of the goods sold and it is done as follows:

Opening stock xxx

Add: purchase xxx

Freight xxx

Goods available for sale xxx

Less: closing stock xxx

Cost of goods sold xxx