[Class 11 Accountancy Notes, AHSEC, CBSE, Chapter Wise Notes, Financial Statements]
Class 11 Accountancy Notes
AHSEC Class 11 Notes
Unit – 7: Financial Statements
Q.1. What is financial statements?
Mention its types and objectives. Who are the users of financial statements?
2016
Ans:
Meaning: The financial statement provide a summary of the accounts of a
business enterprise. Financial statement include two statements include two
statements:
a) Trading
and Profit and Loss Account‟ or Income Statement‟ (To Know Profit or loss)
b) Balance
Sheet (To know value of assets and liabilities on the closing date of an
accounting period)
Objectives
and Uses of Financial Statements
a) To provide
information about economic resources and obligations of a business.
b) To provide
information about earning capacity of the business.
c) To provide
information about cash Flows.
d) To judge
effectiveness of management.
Users of Accounting Information:
Internal Users: Management, Employees, Current
owners.
External Users: Potential Investors
Government, Banks/Lenders, Stock Exchange, Suppliers and Trade Creditors,
Public.
Q.2. What is operating profit, Gross profit
and net profit? 2010
Ans:
Operating Profit: Operating profit is that profit which is earned through the
normal activities of the business. It can be ascertained by deducting all
operating expenses from the gross profit.
Gross Profit: It is the excess of net sales
over cost of goods sold. It is the profit added by the owner to sale the goods
to the customers. Excess of cost of goods sold over net sales is called gross loss.
Net Profit: Net profit is that profit which is
earned after deducting all operating as well as non operating expenses from the
Gross Profit.
Q.3. What is balance sheet? Give five
characteristics and objectives of balance sheet. 2006
Ans:
Balance sheet is one of the
financial statements prepared by the company to show the financial position of
company at a particular time. Balance sheet is prepared to ascertain the
position of assets and liabilities of the company at a particular date.
The
Balance Sheet of a business possesses the following characteristics:
a) Balance
sheet being a statement has no
‘debit’ or ‘credit’ sides that is why ‘To’ or ‘By’ words are not
prefixed to the name of accounts.
b) Balance
sheet is prepared at the end of an accounting period – it is for a particular
day, so it discloses the financial position on a particular day and not for a
particular period.
c) Balance sheet
discloses how much business owes to others and how much others owe to business.
d) The total
of ‘Assets’ and ‘Liabilities’ sides are always equal.
Objectives
of Balance Sheet
a)
To determine the nature and value of the
assets.
b)
To determine the nature and extent of
liabilities and actual capital.
c)
To know about the solvency of the business
d)
To know the financial soundness of the
business i.e. Over-trading and under-trading.
Q.4. What do you mean by Grouping and
Marshalling of Assets and Liabilities in Balance sheet? 2009
Ans:
Grouping means presenting
similar items together as one figure i.e. by combining them at one place and
presenting as a single item on the face of financial statement.
Marshalling means presenting
items in a logical order i.e. assets and liabilities in the statement of
financial position are listed in particular order. There are two methods of
marshalling:
a) Marshalling
by liquidity: According to this method the assets and liabilities are
listed in descending order on the basis of liquidity i.e. the asset which is
the most liquid will be listed first and the asset which is least liquid will
be listed last.
b) Marshalling
by permanence: This method is completely opposite to the liquidity
method. According to this order of listing, assets and liabilities are listed in
descending order on the basis of their permanence i.e. the asset with the
longest useful life (least liquid) will be listed first and the asset with the
least or shortest (most liquid) useful life will be listed last.
Q.5. What is trading account? Mention
various purposes of preparing trading account. 2009, 2015, 2018, 2019
Ans: Trading account is one of
the financial statements prepared by the company to show the result of buying
and selling of goods and services during an accounting period. Trading account
is prepared to ascertain the gross profit or gross loss.
Objectives
or Need for Trading Account: The trading account may be prepared with the
following objectives:
1) To
ascertain gross profit or gross loss.
2) To know
the direct expenses.
3) To make
comparison of stock.
4) To fix up
selling price of goods.
5) To know
the limit of indirect expenses.
Q.6. What is Profit and loss account? Mention
its features and objectives. 2009,
2010.
Ans:
Profit and loss account is one of
the financial statements prepared by the company to show the financial
performance of company during an accounting period. It is prepared to ascertain
net profit or net loss. It is also called income statement.
Features
of Profit & Loss Account
1) Profit and
Loss Account is nominal account to be prepared at the end of the year.
2) Incomes
and expenses relating to current year are to be shown in it.
3) It
includes outstanding expenses and accrued incomes relating to current year
which are taken into consideration while prepare expenses and incomes received
in advance are excluded from it.
4) It
includes all expenses paid during the previous year but related to current year
and all incomes received during the previous year but related to current year.
Need for
Profit & Loss Account
1) Knowledge
of net profit or net loss for the year.
2) Comparison
of profits over the years.
3) Control
over expenses by establishing the relationship of indirect expenses with sales.
4) On the
basis of information disclosed by the profit and loss account, the future
course of action may be decided by the management.
5) The net
profit disclosed by profit and loss account is the basis of determining
business income for tax purposes. Thus, profit and loss account helps in tax
assessment also.
6) Helpful in
the preparation of balance sheet.
Q.7. What do you mean by adjustment entries?
Give two examples of adjustment entry. 2010
Ans:
Accounting adjustment are those transactions of a company’s business that are
recorded at the end of the accounting period. The journal entries for such
transactions are passed at the end of the accounting period and are called as
adjustment entries. Examples for adjustment entries:
a)
Adjustment of closing stock: Closing Stock A/c Dr.
To
Trading A/c
b)
Adjustment of prepaid expenses: Prepaid Expenses A/c Dr.
To
Respective Expenses Account
c)
Adjustment of outstanding expenses: Respective Expenses A/c Dr.
To
Outstanding Expenses A/c
Q.8. Give
five points of difference between a Trading Account and Profit and Loss
Account. 1x5=5
Ans: Difference between Trading and Profit and loss Account
Trading
Account
|
Profit
and Loss Account
|
|
1. Trading
Account is the first part of Trading and Profit & Loss Account. 2. Trading
Account is prepared to calculate gross profit of the business enterprise. 3. In the
Trading Account, items related to direct expenses and direct incomes are
recorded. 4. The balance
of Trading Account viz. gross profit or gross loss is to be transferred to
the Profit & Loss Account. |
1. Profit &
Loss Account is the second part of the Trading and Profit & Loss Account. 2. Profit &
Loss Account is prepared to calculate the net profit of the business
enterprise. 3. In the
Profit & Loss Account, items related to indirect expenses and indirect
incomes are recorded. 4. The balance
of Profit & Loss Account viz., net profit or net loss is to be
transferred to the Balance Sheet by way of adjustments in the capital of the
proprietor. |
Q.9.
Give five distinctions between Balance Sheet and Trial Balance. 2017,
2019
Ans:
Balance sheet is one of the
financial statements prepared by the company to show the financial position of
company at a particular time. Balance sheet is prepared to ascertain the
position of assets and liabilities of the company at a particular date.
Trial Balance: After
posting the accounts in the Ledger, a statement is prepared to show separately
the debit and credit balances and to check the arithmetic accuracy of the
accounts of a certain periods such a statement is known as the Trial Balance.
Difference between Balance sheet and Trial
Balance
|
Basis |
Balance sheet |
Trail balance |
|
1) Meaning |
Balance
sheet is one of the financial statements prepared by the company to
show the financial position of company at a particular time. |
Trial
Balance is prepared with the help of balances of ledger accounts to check
the arithmetic accuracy of the accounts of on a particular date. |
|
2) Purpose |
It shows the
financial position. |
It checks the
arithmetical accuracy of books of accounts. |
|
3) Types of
accounts |
Personal, real
and nominal accounts are shown in trial balance. |
Only personal
and real accounts are shown in balance sheet. |
|
4) Preparation |
Balance sheet
is prepared with the help of trial balance. |
Trial balance
is prepared before balance sheet. |
|
5) Use |
It is prepared
for both internal and external users of financial statements. |
It is prepared
mainly for internal users. |