Financial Statements
BALANCE SHEET
• A balance sheet shows details about the financial status of a firm at a
particular point in time.
• Reserve
1. Capital Reserve
Includes share premium account, revaluation reserve and capital
redemption reserve.
Cannot be distributed as dividend to shareholders
2. Revenue Reserve
Represents accumulated retained earnings from the profit of the business
Held in accounts like investment allowance reserve, dividend equalization
reserve, taxation reserve
• Surplus
1. Balance in profit and loss account which has not been appropriated to
any particular reserve account
• Reserve + Surplus+ Paid up capital = Owners
equity/Shareholders funds/ Net worth
Loans
• Secured Loans
1. Secured by a charge on assets of the firm
2. Most common form of secured loans are debentures, term loans and
working capital loans
• Unsecured Loans
1. Not secured by a charge on assets of the firm
2. Most common form of unsecured loans are public deposits, commercial
paper, unsecured loan from promoters, unsecured loans from commercial
banks and financial institutions.
Current Liabilities and Provisions
• Fixed assets are assets of permanent nature which are purchased for
long-term use in the business.
• Assets may be tangible or intangible
• Tangible and intangible fixed assets reported in balance sheet to their
net book value
• Example- machinery , motor vehicle , furniture etc
Investments
• Current assets are those assets, which can be converted into cash easily
• Example- bank balance , bills receivable, debtors etc.
• Major components of current assets, loans and advances
1. Inventories (also called as stocks) – comprises raw materials, work-in-progress,
finished goods
2. Sundry debtors (also called as amounts receivable)- represents amount owned
to the firm by the customers.
3. Cash & Bank Balance
4. Other current assets – represents interest accrued on investment, fixed assets
held for sale
5. Loans and Advances
Misc. Expenditures and Losses
• The sequence or the order in which the various assets and liabilities are
arranged in the balance sheet is known as marshalling
• The assets and liabilities are arranged in two ways in the balance sheet
1. In the order of liquidity or realisability
2. In the order of permanence
ASSEST AND LIABILITIES IN ORDER OF
LIQUIDITY
ASSET AND LIABILITIES ARE ARRANGED IN
ORDER OF PERMANENCE
EXAMPLE FOR BALANCE SHEET
The trading account shows the income from sales and the direct costs
of making those sales. It includes the balance of stocks at the start and
end of the year.
Sales 1200
Cost of sales 300
Other direct cost 100
Gross Profit 800 Trading account
Overheads & expenses 260
Operating Profit 540
Interest Charges 30
Net Profit 510
Taxation 60
Profit After Tax 450
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Sales: the amount of money generated by sales
Expenses
Net Profit
Dividends
Retained
Increase in assets
profit
Measuring Loss
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Income
Costs
Net Loss
Dividends
Retained
Decrease in assets
loss
Yearly Profit and Loss
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By law, if your business is a limited company or a partnership whose
members are limited companies, you must produce a profit and loss account
for each financial year
Self employed sole traders and most partnerships don’t need to create a
formal profit and loss account - the information they complete on the self
assessment tax return form amounts to the same thing
However, there are key benefits to producing formal accounts. If you are
looking to grow your business, or need a loan or mortgage, for example, most
institutions will ask to see three years’ accounts
Limitations of Income Statement
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Items that might be relevant but cannot be reliably measured are not
reported (e.g., brand recognition and loyalty)