Understanding financial statement
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The document provides an overview of accounting processes and financial statements. It discusses the steps in accounting transactions, rules of accounting, and provides an illustrative exercise. It then explains how to prepare key financial statements - the balance sheet, income statement, and cash flow statement. The objectives and mandatory components of annual financial reports are also outlined. The document aims to help understand the basic concepts and preparation of financial statements.
Understanding financial statement
- 2. Issues Discussed 1. Process of Accounting through Illustration 2. Financial Statements 2
- 3. Process of Accounting • Identify the Accounts/items involved in a transaction • Classify the type of Account/item Involved in a transaction (Real, Nominal, Personal) • Apply the rule and enter the transaction • (Journal, Ledger, Trial Balance & Final Accounts) 3
- 4. Rules of Accounting • What Comes in Dr., What goes Out Cr. • Receiver Dr., Giver Cr. • All expense/Losses Dr., All Incomes Cr. • Exercise 4
- 5. Exercise • Mr. Rajesh Rai Started a new business with an initial investment of 10,00,000 Rs. • He Deposited 80% money in a bank account and the rest was retained by him in business. • He went on to purchase Machines worth Rs. 3,50,000 and Office furniture of 1,00,000. The payment was made through cheque. • Mr. Rajesh ordered his supplier Mr. Sohan to provide raw material, worth Rs. 5,00,000. The order was placed on credit condition. 5
- 6. Exercise • During the process, Mr. Rajesh hired 5 workers who were paid wages of 50,000 in total in cash. • After the goods were ready, a part of it was sold in retail market worth Rs. 3,50,000 on cash and Rs. 3,00,000 on credit to Mr. Sanjay. • The amount received from retail market was deposited in bank • A cheque was issued to Mr. Sohan for 4, 95,000 in full settlement. 6
- 7. Exercise • Amount equal to Rs. 50,000 was spent on promotion. • A cheque of Rs. 2,99,000 was received from Mr. Sanjay in full and was deposited in bank. • The other expenses were Stationary 10,000 and Administrative Rs. 45,000. 7
- 8. Solution S.No. A/C name A/C Type Rule Explanation Rajesh is Mr. Rajesh Rai Started a new Capital A/c Personal Cr. The giver Giver, so Credit business with an initial 1 investment of 10,00,000 Rs. Dr. What comes Cash is Cash A/c Real in coming, so Dr. Money Received by He Deposited 80% money in a Bank A/c Personal Dr. the receiver Bank, so Dr. 2 bank account and the rest was Cash is going, retained by him in business. Cash A/c Real Cr. What goes out So Cr. Machine is He went on to purchase Machine A/c Real Dr. what comes in Coming, So Dr. Machines worth Rs. 3,50,000 Furniture is 3 and Office furniture of Furniture A/c Real Dr. what comes in Coming, So Dr. 1,00,000. The payment was Bank is Giver, made through cheque. Bank A/c Personal Cr. The giver So Cr. Mr. Rajesh ordered his supplier Mr. Sohan to provide raw material, worth Rs. 4 5,00,000. The order was Sohan is Giver, 8 placed on credit condition. Sohan A/c Personal Cr. The giver So Cr.
- 9. Solution S.No. A/C name A/C Type Rule Explanation During the process, Mr. Wages are Exp. So Rajesh hired 5 workers Wages A/c Nominal All Exp. Dr. Dr. 5 who were paid wages of Cash is going, So 50,000 in total in cash. Cash A/c Real Cr. What goes out Cr. After the goods were Goods are Going, ready, a part of it was sold Sales A/c Real Cr. What goes out So Cr. in retail market worth Rs. Sanjay is Receiver, 6 3,50,000 on cash and Rs. Sanjay A/c Personal Dr. the receiver So Dr. 3,00,000 on credit to Mr. Cash is Coming, so Sanjay. Cash A/c Real Dr. what comes in Dr. Bank is Receiver, The amount received from Bank A/c Personal Dr. the receiver So Dr. 7 retail market was Cash is going, So deposited in bank. Cash A/c Real Cr. What goes out Cr. Sohan is Receiver, Sohan A/c Personal Dr. the receiver So Dr. A cheque was issued to Discount Discount is 8 Mr. Sohan for 4, 95,000 in Received A/c Nominal Cr. All Incomes Income, So Cr. full settlement. Bank is Giver, So Bank A/c Personal Cr. The giver Cr. 9
- 10. Solution S.No. A/C name A/C Type Rule Explanation Amount equal to Rs. Advertisem Advt. Is Exp., So 50,000 was spent on ent A/c Nominal All Exp. Dr. Dr. 9 promotion. Cr. What goes Cash is going, Cash A/c Real out So Cr. Sanjay is Giver, Sanjay A/c Personal Cr. The giver So Cr. A cheque of Rs. Bank is 2,99,000 was received Bank A/c Personal Dr. the receiver Receiver, So Dr. 10 from Mr. Sanjay in full Discount and was deposited in Allowed Discount is bank. A/c Nominal All Exp. Dr. Loss, So Dr. Stationary Stationary is A/c Nominal All Exp. Dr. Exp., So Dr. The other expenses were Stationary 10,000 Administrat and Administrative Rs. ive Exp. Admn. Exp is 11 45,000. A/c Nominal All Exp. Dr. Dr. Cr. What goes Cash is going, Cash A/c Real out So Cr. 10
- 11. Ledger Posting & Trial Balance • After Journal entry the process is followed by Ledger Posting and Preparation of Trial Balance. 11
- 12. Financial Statements 12
- 13. Mandatory Financial Statements • For Corporate (Vertical) – Statement of Financial Position i.e. Balance Sheet – Income Statement – Statement of Cash Flows • For Individual/HUF/Partnership – Statement of Financial Position i.e. Balance Sheet – Trading Account – Profit and Loss Account 13
- 14. Objectives of Financial Statement • Useful for investment decisions. (All financial statements) • Comprehensible. (All financial statements) • About economic resources and claims on resources (Balance Sheet). • About financial performance during a period (Income Statement). • About cash flows (Statement of Cash Flows). 14
- 15. Balance Sheet • Point in time or status report. • More formally, Statement of Financial Position. • Contains (and shows equality of amounts of): – Assets. – Liabilities and Owners’ equity. 15
- 16. Income Statement • Summary of All the incomes and expenditure during the financial year. • The net difference is profit/loss 16
- 17. Annual Report Annual reports are widely distributed to shareholders and are provided to domestic researchers upon request. The annual report of a company is generally available on website also.
- 18. Motive to create and distribute annual report is • Present an overview of the company, managements discussion of the company's preceding year performance and the company’s plan for the future. • Report the company’s financial performance for the previous year, and compare performance to prior years. • Fulfill part of their obligations for public financial reporting mandated by the primary securities regulatory body.
- 19. Content Mandatory contents a. Income Statement b. Balance sheet c. Cash flow statement d. Statement of accounting Policies e. Auditors Report f. Management Discussion g. Notes to the Accounts h. Selected Financial Data
- 20. Cont… Optional • Financial Highlights • Letter to stockholders • Corporate message • Board of directors and management • Stockholder information
- 21. Financial Statement Format for Individual/HUF/Partnership 21
- 22. Trading A/C of ………………………………………year ending 31st March 2012. Dr. Cr. Particulars Amount Particulars Amount To Purchase By sales To Opening Stock By Closing Stock *(if given To wages outside the trial balance) To Fuel, Power, By Gross Loss (if Dr. Side To Factory Light is More) To Carriage inward To Freight To Octroi (All expense related to purchase and all direct expense i.e. the expense related to manufacturing) To Gross Profit (if Cr. Side is More) Total Total Also Note= Purchase + all Direct Expense + opening Stock- Closing Stock= Cost of Goods Sold (COGS) And Sales- COGS= Gross Profit
- 23. P&L A/C of ………………………………………year ending 31st March 2012. Dr. Cr. Particulars Amount Particulars Amount To Gross Loss(Cross By Gross profit (Cross transfer from Trading transfer from Trading Account) Account) To salary By Rent Received To Repairs By Commission received To Advertisement By Discount Received To Discount Allowed By Net Loss (If Dr. Side is To rent More) To Bad debts To Office expense (All indirect expense i.e. all expense related to office and administration, sales) To Net Profit ( If Cr. Side is More) Total Total
- 24. Balance Sheet As on 31st March 2012 Note- We do not write Dr. and Cr. Side on Balance Sheet. We do not use To and By word in Balance Sheet Liabilities Amount Assets Amount Capital Machine + Net Profit/Loss Furniture -Drawings Building Bank Loan Equipment Creditors Closing stock* Bills Payable Cash (all liabilities Short and Bank balance long term) Debtors (all short and long term assets Total (always equal) Total (always equal) Note- The total will be equal if the given trial balance is correct. If trial balance Dr side and Cr side has a difference, balance sheet will also have the same difference.
- 25. Financial Statement Format for Companies 25
- 26. STATEMENT OF PROFIT AND LOSS Profit and Loss statement for the year ended 31st March, 2012 Figures as at the end Figures as at the end Particulars Note No of current reporting of previous reporting period period I. Revenue from operations II. Other Income III. Total Revenue (I +II) IV. Expenses: Cost of materials consumed Purchase of Stock-in-Trade Changes in inventories of finished goods, work-in-progress and Stock-in-Trade Employee benefit expense Financial costs Depreciation and amortization expense Other expenses Total Expenses V. Profit before exceptional and extraordinary items and tax (III - IV) VI. Exceptional Items VII. Profit before extraordinary items and tax (V - VI) VIII. Extraordinary Items IX. Profit before tax (VII - VIII) X. Tax expense: (1) Current tax (2) Deferred tax XI. Profit(Loss) from the perid from continuing operations (VII-VIII) XII. Profit/(Loss) from discontinuing operations XIII. Tax expense of discounting operations XIV. Profit/(Loss) from Discontinuing operations (XII - XIII) XV. Profit/(Loss) for the period (XI + XIV) XVI. Earning per equity share: (1) Basic 26 (2) Diluted
- 27. BALANCE SHEET Balance Sheet as at 31st March, 2012 Figures as at the end of Figures as at the end of Particulars Note No previous reporting current reporting period period I. EQUITY AND LIABILITIES (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (c) Money received against share warrants (2) Share application money pending allotment (3) Non-Current Liabilities (a) Long-term borrowings (b) Deferred tax liabilities (Net) (c) Other Long term liabilities (d) Long term provisions (4) Current Liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions Total II.Assets (1) Non-current assets (a) Fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non-current investments (c) Deferred tax assets (net) (d) Long term loans and advances (e) Other non-current assets (2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short-term loans and advances 27 (f) Other current assets Total