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Accounting & Finance

MBA 1st Semester

Module II

Final Accounts

Financial Statements
It refers to the statements which report

the profitability and the financial position of the business at the end of accounting period. It includes two basic statements:
Income statement or Trading and Profit and Loss Account. Position Statement or Balance Sheet.

Objectives of Preparing Financial Statements


To present a true and fair view of the

financial performance of the business (Profit and Loss). To present a true and fair view of the financial position of the business (Assets and Liabilities)

Users of Financial Statements


Management

Investors
Short Term Creditors Long Term Creditors

Employees
Government Taxation Authorities

Other Users

Final accounts Income Statement Income Expenses Balance Sheet Assets


Liabilities

TRADING & PROFIT & LOSS A/C

Trading & Profit & Loss a/c


Prepared to determine the profit earned or loss sustained by the business enterprise during an accounting period Summary of revenue & expenses & calculates the net figures termed as profit or loss. Revenue less expenses = Profit When expenses are more than revenue loss

Trading a/c

Prepared to know the gross profit or gross loss during the accounting period

RELEVANT ITEMS IN THE TRADING A/C

Opening stock Stock of goods in hand at the beginning of the accounting period This is previous years closing stock It appears on the debit side of the trial balance

RELEVANT ITEMS IN THE TRADING A/C

Wages

Remuneration paid to workers who are directly engaged in factory for loading, unloading and production of goods

RELEVANT ITEMS IN THE TRADING A/C

Purchases less returns


Goods that have been bought for resale Include both cash & credit purchases The following items are shown by way of deduction from the amount of purchases:

Goods returned to suppliers purchase returns/returns outward Goods withdrawn by proprietor for personal use Goods distributed by way of free samples Goods given as charity

The computed amount is NET PURCHASES

RELEVANT ITEMS IN THE TRADING A/C

Direct Expenses All expenses directly connected with the manufacture, purchase of goods and bringing them to the point of sale. E.g. carriage inwards, freight inwards, wages, factory lighting, coal, water, gas, fuel, royalty on production, octroi, import duty

RELEVANT ITEMS IN THE TRADING A/C

Carriage inwards/freight inwards

Transportation expenses, incurred for bringing materials/goods purchased to the place of business.

RELEVANT ITEMS IN THE TRADING A/C

Fuel/Water/Power/Gas

Used in the production process

RELEVANT ITEMS IN THE TRADING A/C

Packing material & packing charges Primary packing direct Trading a/c Secondary packing indirect P & L a/c

RELEVANT ITEMS IN THE TRADING A/C

Sales less returns Gross total sales both cash & credit Goods returned by customers i.e. sales returns or returns inwards shown by way of deduction from sales, thereby getting NET SALES

EXPENDITURE

EXPENSE

Expenditure is a wider term and includes expenses as well as assets. Expenditure is any outlay made/incurred by the business firm

The part of the expenditure, which is perceived to have been used or consumed in the current year

Difference between expenditure & expense

CAPITAL EXPENDITURE

REVENUE EXPENDITURE

Increases earning capacity of the business Incurred to acquire fixed assets for operation of business Non-recurring in nature Benefits more than one accounting year Recorded in balance sheet subject to depreciation

Incurred to maintain the earning capacity Incurred on day-to-day conduct of business generally recurring in nature Normally benefits one accounting year Transferred to trading & P&L a/c

Distinction between capital & revenue expenditure

Examples of capital expenditure


Payment to acquire fixed assets for use in the business Payment made for additions/extensions in the fixed assets

Examples of revenue expenditure


Payment of salaries Payment of rent

Deferred revenue expenditure

Sometimes its difficult to demarcate expenditures into revenue & capital Normally, advertisement expenditure is revenue But heavy advertisement expenditure on launching a product capital expdr benefit for more than one accounting period as people are likely to remember the advertisement for a slightly longer period. Such revenue expenditures, which are likely to give benefit for more than one accounting period, are termed as deferred revenue expenditure. They are also written-off over their expected period of benefit.

CAPITAL RECEIPTS CAPITAL RECEIPTS

REVENUE RECEIPTS

If the receipts imply an obligation to return the money, these are capital receipts Also receipts from capital assets E.g. Additional capital brought in by the owner, a loan taken from the bank, sale of a fixed asset

If a receipt does not incur an obligation to return the money or is not in the form of a sale of fixed asset Received as a result of business operations E.g. receipts sales made by the firm and interest on investment received by the firm

Distinction between capital & revenue receipts

Profit & Loss a/c

Prepared to ascertain the Net profit earned or Net loss incurred by the business during an accounting period.

Exercise

From the following balances obtained from the few accounts of Mr. Bala. Prepare the Trading and Profit and Loss Account. Repairs 600 Stock on Apr. 01, 2010 Rs. 8,000, Bad debts Rs. 1,200 Purchases for the year Rs. 23,000 Sales expenses Rs. 600 Rent Rs. 1,200 Sales for the year Rs. 44,000 Discount allowed Rs. 600 Wages Rs. 700 Purchase returns Rs. 1000 Purchase expenses Rs. 2,500 Commission paid Rs. 1,100 Salaries and wages Rs. 3,500 Sales returns Rs. 2000 Advertisement Rs. 1,000 Closing stock on March 31, 2011 is Rs. 4,500

Exercise From the following balances obtained from the few accounts of Mr. Lalu.
Prepare the Trading and Profit and Loss Account.

Sales 75,250 Purchases 32,250

Opening stock 7,600


Sales return 1,250 Purchases return 250 Rent 300, Stationary and printing 250, Salaries 3,000

Misc. expenses 200


Travelling expenses 500, Advertisement 1,800 Commission paid 150 Office expenses 1,600, Wages 2,600

Profit on sale of investment 500


Depreciation 800 Dividend on investment 2,500 Loss on sale of old furniture 300

Closing stock (March 31, 2005) valued at Rs. 8,000

Balance Sheet

A statement of financial position of an enterprise at a given date which exhibits its assets, external liabilities, capital & reserves.

QUESTION:

Why is a balance sheet called a BALANCE sheet ?

It is called a balance sheet because it is a sheet of balances of those ledger accounts (i.e. Personal and Real accounts) which are never closed

Purpose of a balance sheet


To ascertain the nature & value of the assets of a business To ascertain the nature & amount of the liabilities of a business. To find out the financial solvency of an enterprise . An enterprise is considered solvent if its assets exceed its liabilities.

Marshalling & Grouping of assets & liabilities


The information provided in the financial statement should be presented in such a way so as to facilitate decision-making. Therefore, it becomes necessary that the items appearing in the balance sheet should be properly grouped and

presented in a particular order.

Marshalling of assets & liabilities


Arrangement of assets and liabilities in a particular order is known as Marshalling The assets and liabilities are arranged either in the

order of liquidity or order of permanence

Order of Liquidity
Assets are arranged in the order of their liquidity. i.e. the most liquid asset (e.g. cash in hand) is shown first. The least liquid asset (e.g. goodwill) is shown last. Liabilities are arranged in the order of their urgency of payment i.e. the most urgent payment to be made (e.g. short term creditors) is shown first. The least urgent payment to be made (e.g. long term creditors) is shown last

Balance Sheet of as on
Liabilities Current liabilities: Bank overdraft Bills payable Outstanding expenses Sundry creditors Income received in advance Long term liabilities: Loans Debentures Reserves: Capital: Opening balance (+)/(-) Profit / Loss (-) Drawings Rs. Assets Current assets: Cash in hand Cash at bank Bills receivable Sundry debtors Prepaid expenses Accrued income Closing stock Investments: Fixed assets: Furniture & fittings Plant & machinery Building Land Goodwill Rs.

Order of Permanence

The most permanent asset or liability is put on the top in the balance sheet and thereafter the assets are arranged in their reducing level of permanence.

Balance Sheet of as on
Liabilities Capital: Opening balance (+)/(-) Profit / Loss (-) Drawings Reserves: Long term liabilities: Debentures Loans Current liabilities: Income received in advance Sundry creditors Outstanding expenses Bills payable Bank overdraft Rs. Assets Fixed assets: Goodwill Land Building Plant & machinery Furniture & fittings Investments: Current assets: Closing stock Accrued income Prepaid expenses Sundry debtors Bills receivable Cash at bank Cash in hand Rs.

Grouping of assets & liabilities


Putting together items of similar nature under a common heading. For example, the balance of accounts of cash, bank, debtors, etc. can be grouped and shown under the heading of current assets

Contingent liability
One which is not an actual liability but which will become one on the happening of some uncertain future event. Disclosure - disclosed by way of a note to the balance sheet

Bills of exchange discounted but not yet matured Claim against the company not acknowledged as debt e.g. suit for damages against the company Guarantees given by the company to companies under the same management Gratuities payable to staff on retirement or death

Examples of Contingent liability