FINANCIAL STATEMENTS ( WITHOUT & WITH ADJUSTMENTS )

1. FINANCIAL STATEMENTS(WITHOUT & WITH ADJUSTMENTS)

2. INTRODUCTION Final accounts are prepared to achieve the objectives of accountancy. A business man is interested to know the final results of the business – whether he has earned profit or suffered loss in that particular accounting period. Two main objectives of maintaining accounts are : • To find out profit or loss made by the business at the end of regular periodic intervals, and • To ascertain the financial position of the business on a given date. In order to know profit or loss earned by a firm, income statement or trading and profit and loss account is prepared. Balance sheet or position statement will portray the financial condition of a firm on a particular date. These two statements i.e. trading and profit and loss account and balance sheet are prepared to give the final results of the business, that is why both these are collectively called as final accounts.

3. INTRODUCTION Thus, final accounts includes the preparation of : • Trading and profit and loss accounts ; and • Balance sheet. “Financial statements are prepared for the purpose of presenting a periodic review or report on the progress by the management and deal with the : • Status of the investments in the business and ; • Results achieved during the period under review” - American Institute of Certified Public Accountants

4. Definition of Financial Statements According to John N. Myer “ The financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets and liabilities and the income statement showing the results of operations during a certain period.” This definition emphasises the importance of Balance sheet and profit & loss Account , but ignores the importance of other financial statements like Cash Flow Statement and Utilisation of surplus account.

5. Attributes of financial Statements • Relevance • Accuracy and freedom from basis • Comparability • Analytical Presentation • Promptness • Generally Accepted Principles • Consistency • Authenticity • Compliance with law

6. Objectives of Financial Statements • To provide reliable financial information about economic resources and obligations of a business enterprise. • To provide reliable information about the net resources of an enterprise that results from its activities. • To provide financial information that assists in estimating the earning potentials of a business. • To provide other needed information about changes in economic resources or obligations. • To disclose, to the extent possible , other information related to the financial statements that is relevant to the needs of the users of these statements.

7. Users of Financial Statements • Owners • Creditors • Investors • Employees • Government • Research Scholars • Consumers • Managers

8. Limitations of financial Statements • Interim and not final reports • Lack of precision and definiteness • Lack of objective judgement • Records only monetary facts • Historical in nature • Artificial view • Scope of manipulations • Inadequate information

10. Composition of Final Accounts Manufacturing organization Trading Organization

11. BASIS OF ACOUNTING There are two basis of accounting:- • Cash basis: inflow and outflow of cash are the basis of recognizing income and expenses. It means an income is considered as earned only when it is received in cash. Business organizations usually do not follow cash basis of accounting.. • Accrual basis: incomes are considered in the period in which they are earned irrespective of the fact whether cash has actually been received or not. Similarly, expenses are charged to the period in which they help in earning incomes without considering whether cash has actually been paid or not. The business houses usually follow this basis of accounting.

12. TRADING ACCOUNT: Trading account is the first part of financial statements which shows the results of buying and selling of goods and services during an accounting period. “The trading account shows the results of buying and selling of goods. In preparing this account, the general establishment charges are ignored and only the transaction in goods included.” -J.R. Batliboi The purpose of trading account is to ascertain gross profit or gross loss of the business. The ‘net sales’ of an accounting period are matched with the ‘cost of goods sold’ or ‘cost of services rendered.’ If the amount of net sales is more then the amount of net sales, the difference is called gross loss. Gross profit is the profit added by the owner in the cost of goods sold to sell the goods to the customer.

13. Specimen of Trading Account DR. CR.

14. DR. CR.

15. Profit and Loss Account • After the preparation of trading account, the next step is to prepare profit & loss account with a view to ascertain the net profit or net loss during the accounting period. “The profit and loss account can be defined as the report that summarizes the revenues and expenses of an accounting period to reflect changes in various critical areas of firm’s operations”. • “The function of the profit & loss account is to enable the trader to ascertain the net profit or net loss resulting from business transactions during a given period”.-J.R. Batliboi

16. Specimen of Profit and Loss Account Profit and loss account can be prepared either in horizontal or vertical format. The horizontal format of a profit and loss account is given below: DR. PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED…… CR.

17. DR. CR.

18. DR. CR.

19. DR. CR.

20. DR. CR.

21. DR. CR.

22. BALANCE SHEET The trading account and profit and loss account do not help in ascertaining the real position of assets, liabilities and capital. A balance sheet is prepared at a particular point of time. It means the balance sheet discloses the assets owned by the business and the total claims of the outsiders and owners against these assets at a particular point of time. The sum of liabilities and capital should be equal to assets. Assets = Liabilities + Capital The difference between asset and liabilities is capital i.e., proprietor’s claim. If the assets are more than the liabilities, the business is set to b solvent. In contrary to this, if the liabilities i.e., amount payable to outsiders is more than the assets, the business is said to be insolvent. It means assets are insufficient to pay outside liabilities and nothing is left for the proprietor.

23. CONTD. Definitions: Balance sheet is the final phase in accounting cycle. It is a ‘mirror’ which reflects the true position of the assets and liabilities of the business on a particular day. “A Balance Sheet is an item-wise list of assets, liabilities and proprietorship of a business at a certain date.” -Freeman

24. “Assets are things of value owned.” assets include properties, possessions or rights owned by a business which have monetary value. The various assets shown in the balance sheet are classified as under :

25. Specimen of Balance Sheet BALANCE SHEET OF X ON 31ST MARCH, 2010

27. Adjustments

28. Closing stock The unsold goods lying in stock at the end of the accounting period are called closing stock . Stock a/c Dr. To trading a/c Effect: • Stock will be shown on the assets side of the balance sheet. • It will be shown on the credit side of trading account

29. Outstanding Expenses Those expenses which have been incurred and are due for payment i.e., not paid as yet are called Outstanding expenses. Salaries a/c Dr. To Outstanding salaries a/c Effect: • It will be shown on dr. side of P&L a/c. • It will be shown on the liabilities side of balance sheet.

30. Prepaid Expenses Those Expenses which have been paid in advance i.e., whose benefit will be available in future are called prepaid expenses. Prepaid Expenses a/c Dr. To expenses a/c Effect: • Prepaid expenses will be shown in P&L by way of deduction from the expenses. • It will be shown on the asset side of balance sheet.

31. Accrued Income That income which has been earned but not received during the accounting year is called accrued income. Accrued Interest a/c Dr. To Interest a/c Effect : 1.It will be shown on the credit side of P&L a/c by way of addition. 2. It will be shown on asset side of balance sheet.

32. Income received in Advance Income received but not earned during the accounting year is called as income received in advance. Rent a/c Dr. To Rent Received in advance a/c Effect: • It will be shown on cr. Side of P & L a/c by way of deduction from the income. • It will be shown on the liabilities side of balance sheet.

33. Depreciation Depreciation is the reduction in the value of fixed asset due to its use, wear and tear or obsolescence. Depreciation a/c Dr. To Asset a/c Effect: • Dep. is shown on the debit side of P& L a/c. • It is shown on the asset side by way of deduction from the value of concerned asset.

34. Interest on capital Sometimes in order to see whether the business is really earning profit or not, interest on capital at a certain rate is provided. Interest on capital a/c Dr. To Partner capital a/c Effect: • It will be shown on debit side of P & L a/c. • It will be shown on liabilities side of balance sheet by way of addition to the capital.

35. Interest on Drawing If intt. on capital is allowed , it is but natural that interest on drawing s should be charged from the proprietor , as drawings reduce capital. Drawings a/c Dr. To Interest on Drawings a/c Effect: • Intt. on drawings will be shown on the credit side of P&L a/c • It will be shown on Liabilities side of balance sheet by way of addition to the drawing which are ultimately deducted from the capital.

36. Bad Debts Debts which cannot be recovered or become irrecoverable are called bad debts. Bad Debts a/c Dr. To Sundry Debtors a/c Effect: • Shown on the debit side of p & l a/c . • Shown on the asset side of balance sheet of balance sheet by way of deduction from sundry debtors.

37. Provision for doubtful debts Sometimes a merchant finds on the last day of the accounting year that certain debts are doubtful i.e., the amt. to be received may or may not be received. P&L a/c Dr. To Prov. For doubtful debts a/c Effect: 1. It will be shown on the debit side of P& L a/c by way of addition to bad debts. 2. Shown on the asset side of balance sheet by way of deduction from sundry Debtors.

38. Provision for discount on debtors If sales are made by the merchant on the condition that if the amt. of sales is paid within a certain period, he will allow a certain percentage of discount. P & L a/c Dr. To Prov. for disc. on Debtors a/c Effect: • Such prov. will be shown on the debit side of P & L a/c • It will be shown by way of deduction from sundry debtors on the asset side of Balance sheet .

39. Reserve for Discount on creditors As firm has to provide for disc. On debtors , similarly , the firm may have chance to receive disc. On the last date of the accounting year, if the payment is made within the scheduled period. Reserve for Disc. on the creditors a/c Dr. To profit & loss a/c Effect: • It is shown on the credit side of profit and loss a/c. • Shown on the liabilities side of Balance sheet by way of deduction from sundry creditors.

40. Deferred Revenue Expenditure The expenditure done in the initial stage but the benefit of which will also be available in subsequent years is called deferred revenue expenditure. P & L a/c Dr. To advertisement a/c Effect: 1. It is shown on debit side of P&L a/c. 2. Shown on the asset side by way of deduction from capitalised

41. Reserve fund Reserve is created out of profit & loss a/c and thus is an appropriation of net profit for strengthening the financial position of the business. P & L a/c Dr. To Reserve Fund a/c Effect: • It is shown on the debit side of p & l a/c with the net profit in the inner column. • It is shown on the liabilities side of balance sheet

42. Goods distributed as free sample Sometimes in order to promote the sale of goods , some of the produced goods are distributed as free samples. Advertisement a/c To purchases a/c Effect: • It is deducted from purchases. • It is shown on the debit side of p & l a/c as advertisement expenses

43. Manager’s Commision Sometimes in order to increase the profits of the concern, manager is given some percentage of commission on the profit of the concern. It can be given at a certain percentage on the net profit . P & L a/c Dr. To commission payable a/c Effect: • Shown on the debit side of P&L a/c • It will be shown on the liabilities side of balance sheet.

44. Goods on sale or approval basis Sometimes goods are sold to customers on approval basis. If they approve , it will become sale . if such goods are lying with customers on the last day of the accounting year and these can be yet returned , it should be treated as stock lying with customer . Sales a/c Dr. To trading a/c Stock a/c Dr. To trading a/c Effect: • Shown on the credit side of trading a/c by way of deduction from the sales at sale price and added to the closing stock at cost price. • Shown on asset side as a deduction from sundry debtors[sale price] and stock at cost on the asset side of balance sheet.

45. Abnormal loss of stock It is avoidable loss usually caused due to fire, theft, abnormal leakage/breakage/spoilage etc. Accounting treatment

46. Following trial balance was extracted from the books of M/s Ramesh and sunder as on 31 march 2013

48. Adjustments: • The partners are entitled for interest on capital at 5% p.a. Sunder is also entitled to Rs.3000 p.a. Salary out of net profits ,if any made. The remaining net profit shall be divided in proportion to their capitals. • Depreciation is to be provided at 2.5% on land and buildings, 10% on plant and machinery. • Provision for doubtful debts is to be increased to 5%on debtors. • Rates 270 and Insurance 160 are to be carried forward. • The stock on 31st march,2013 amounted to 19,910 • Manufacturing wages include 260 pertaining to installation charges of a machinery. Prepare final accounts of M/s Ramesh & Sunder.

49. M/s Ramesh & Sunder Trading and Profit Loss Account For the year ended 31st March,2013