Financial Statements of Non-Corporate Entities
Financial Statements or Final accounts of non-corporate entities
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Table
of Contents |
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1. Meaning and Nature of Financial Statements 2. Characteristics of Ideal Financial Statements 3. Objectives and Uses of Financial Statements 4. Types of Financial Statements 5. Balance sheet – Meaning, Features and Objectives 6. Grouping and Marshalling of Balance Sheet 7. Trading Account – Meaning and Objectives 8. Profit and Loss Account – Meaning, Features and Objectives 9. Adjustment Entries 10. Difference between Trading and Profit and loss Account 11. Difference between Profit & loss account and Balance Sheet 12. Difference between Balance sheet and Trial Balance 13. Difference between Costs of Goods Sold and Cost of Goods
Produced: |
Meaning of Financial statements
Financial statements are the summarized
statements of accounting data produced at the end of accounting process by an
enterprise through which accounting information are communicated to the
internal and external users.
The American Institute of Certified Public
Accountants states the nature of financial statements as “Financial Statements
are prepared for the purpose of presenting a periodical review of report on
progress by the management and deal with the status of investment in the
business and the results achieved during the period under review. They reflect
a combination of recorded facts, accounting principles and personal judgments.”
In the
words of Myer,” The financial statements provide a summary of accounts of a
business enterprise, the balance sheet reflecting the assets, liabilities and
capital as on a certain date and income statement showing the result of
operations during a certain period”.
Nature
of Financial Statements:
a) Recorded
Facts: The Financial statements are statements prepared on the basis of
recorded facts; they do not depict the unrecorded facts.
b) Accounting
Conventions: Certain accounting conventions are followed while preparing
financial statements such as convention of ‘Conservatism’, convention of
‘Materiality’, convention of ‘Full disclosure’, convention of ‘Consistency’.
c) Accounting
Concepts: While preparing financial statements the accountants make a number of
assumptions known as accounting concepts such as going concern concept, money
measurement concept, realisation concept, etc.
d) Personal
Judgement: Personal judgement also has an important bearing on financial
statements. For example, selection of one method out of various methods of
charging depreciation, inventory valuation etc., depends on the personal
judgement of the accountant.
e) Legal
implications: Financial statements are prepared following the legal obligations
of the country. For example, while preparing the financial statement of an
Indian company, the requirements as per the companies Act, 2013 and its
amendments from time to time must be followed.
Characteristics
of Ideal financial Statements are:
a) Understandability: The
information must be readily understandable to users of the financial
statements.
b) Relevance: The information must be
relevant to the needs of the users, which is the case when the information
influences the economic decisions of users.
c) Reliability: The information must be
free of material error and bias, and not misleading.
d)
Comparability: The information must be comparable to the
financial information presented for other accounting periods.
Objectives
and Uses of Financial Statements
Objectives and purposes for which financial
statements are prepared:
a) To provide
information about economic resources and obligations of a business.
b) To provide
information about earning capacity of the business and its
ability to operate of profit in future.
c) To provide
information that is useful in predicting the future earning power of the
enterprise.
d) To judge the
effectiveness of management.
e) To provide
the base for tax assessments.
f) To provide
reliable information about the changes in economic resources that result from
profit directed activities.
g) To show
the financial strength and weakness of the enterprise.
h) To provide
reliable information about the changes in cash position and net economic by
comparing two period financial statements.
i)
To Satisfy the requirements of various users
such as corporate managers, executives, bankers, creditors, shareholders
investors, labourers, consumers, and government institution.
Types of Financial statements
A set of financial statements includes
(Types):
a) Profit and
loss account or Income statements
b) Balance
sheet or Position statements
c) Cash flow
statements
d) Funds flow
statements or
e) Schedules
and notes to accounts.
Balance Sheet and its features and objectives
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.
Grouping and Marshalling of Balance sheet
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.
Also Read: FINANCIAL ACCOUNTING CHAPTERWISE NOTESUNIT 11. Preparation of Trial Balance and Preparation of Financial Statements UNIT 2Part A: Accounting for Partnership UNIT 3 UNIT 4 Some other Important Chapters
Trading Account and Its objectives
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.
Profit and Loss Account and its features and objectives
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.
Adjustment Entries and its examples
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
Difference between Trading and Profit and loss Account
Trading
Account
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Profit
and Loss Account
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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. |
Difference between Profit & loss account and Balance Sheet
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Profit & Loss account |
Balance sheet |
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Profit
and loss account is prepared to find the operating efficiency of the business
organisations. |
Balance
sheet is one of the financial statements prepared by the company to show the
financial position of company at a particular time. |
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It
is an account. |
It
is a statement. |
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Balance
of profit and loss account is transferred to balance sheet i.e.,
added/deducted with capital. |
Balance
sheet is automatically tallied. |
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Only
nominal accounts are shown in profit and loss account. |
Only
personal and real accounts are shown in balance sheet. |
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Profit
and loss account is prepared before preparation of balance sheet. |
Balance
sheet is prepared after preparation of profit and loss account. |
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It
is prepared mainly for internal users. |
It
is prepared for both internal and external users of financial statements. |
Difference between Balance sheet and Trial Balance
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Balance sheet |
Trial balance |
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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. |
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It
shows the financial position. |
It
checks the arithmetical accuracy of books of accounts. |
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Personal,
real and nominal accounts are shown in trial balance. |
Only
personal and real accounts are shown in balance sheet. |
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Balance
sheet is prepared with the help of trial balance. |
Trial
balance is prepared before balance sheet. |
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It
is prepared for both internal and external users of financial statements. |
It
is prepared mainly for internal users. |
Difference between Costs of
Goods Sold and Cost of Goods Produced:
a) Cost of goods sold also termed as cost of
sales is the amount incurred on goods which are actually sold by the business
during the period. It is calculated by the following two formulas:
Cost of goods sold = Net sales – Gross
profit or
Cost of goods sold = Opening stock + Net
purchases + Direct expenses – Closing stock
In some cases indirect expenses termed as
overheads are also added to find cost of goods sold. While calculating cost of
goods sold, only finished goods stocks are taken into consideration.
b) On the other hand, cost of goods produced
is the amount incurred on goods actually produced by the business during the
period. It is calculated as:
Opening stock of raw materials + Net Purchase
of raw materials + All manufacturing expenses – closing stock of raw materials.
While calculating, cost of goods produced, only stock of raw materials are taken into consideration.
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