Faa PDF
Faa PDF
Financial Statements are the collective name given to Income Statement and Positional
Statement of an enterprise which show the financial position of business concern in an
organized manner. We know that all business transactions are first recorded in the
books of original entries and thereafter posted to relevant ledger accounts. For checking
the arithmetical accuracy of books of accounts, a Trial Balance is prepared.
(ii) Positional Statement, i.e., Balance Sheet portrays the operational efficiency and
solvency of any business enterprise.
The income statement shows the net result of the business operations during an
accounting period and positional statement, a statement of assets and liabilities, shows
the final position of the business enterprise on a particular date and time. So, we can
also say that the last step of the accounting cycle is the preparation of financial
statements.
Income statement is another term used for Trading and Profit & Loss Account. It
determines the profit earned or loss sustained by the business enterprise during a
period of time. In large business organization, usually one account i.e., Trading and
Profit & Loss Account is prepared for knowing gross profit, operating profit and net
profit.
On the other hand, in small size organizations, this account is divided into two parts i.e.
Trading Account and Profit and Loss Account. To know the gross profit, Trading
Account is prepared and to find out the operating profit and net profit, Profit and Loss
Account is prepared. Positional statement is another term used for Balance Sheet. The
position of assets and liabilities of the business at a particular time is determined by
Balance Sheet.
Financial statements (or financial reports) are formal records of the financial activities
and position of a business, person, or other entity.
Adjustment item
st nd
1 Effect 2 Effect
Outstanding
Debit side of Trading
Expenses Liabilities side of
and Profit & Loss a/c
by way of addition to Balance Sheet
expenses
from Expenses
of deduction from
Managers Commission
Liabilities side of Balance
Debit side of Profit &
Sheet
Loss a/c
Goods distributed as
Debit side of Profit and Loss
Free Samples Debit side of Trading
a/c as Advertisement
a/c by way of deducted
expenses.
from the purchases
Before Charging Commission = Rate/100* Net Profit before commission
After Charging Commission = Rate/ 100+Rate* Net Profit before commission
1. When Provision for Doubtful debt appears in the Trial Balance and there is
neither bad debt nor further Provision is given:
It will be shown in the credit side of the profit and loss account as is it a gain i.e.
unutilised portion of the provisions made in the last year.
2. When both bad debt and Provision for Doubtful debt appears in the Trial
Balance and there is no further Provision is given in adjustment:
• The amount of provision is subtracted from the given bad debt in debit side of
the profit and loss account.
• If the amount of provision is more than the given bad debt, the excess of
provision over the bad debt is shown on the credit side of the profit and loss
account.
3. When both bad debt and Provision for Doubtful debt appears in the Trial
Balance and there is further bad debt and Provision is given in adjustment:
In this situation, bad debt in the trial balance is added with further bad debt and
provision required given in the adjustment. From the total so obtained the existing
provision given inside the trial balance is deducted. The net amount, thus arrived at
appears on the debit side of the profit and loss account. If the existing provision is more,
the net amount will go to the credit side of the profit and loss account.
Manufacturing Account
The manufacturing account is an account in the general ledger which is used to
accumulate all the manufacturing costs of goods completed by a business during an
accounting period.
For a manufacturing business the manufacturing account needs to be prepared before
completing the trading and profit and loss accounts.
The cost of direct materials used in the manufacturing process during the period.
The cost of direct labor used in the manufacturing process during the period.
Companies refer to either the cost of goods sold (COGS) or the cost of sales on
the balance sheet, or in some cases both, leading to some confusion for investors about
the meaning and implication of the two terms. However, fundamentally, there is almost
no difference between a company's listed cost of goods sold (COGS) and cost of
sales. The two terms are typically used interchangeably in an accounting context.
Financial statement analysis
Financial statement analysis (or financial analysis) is the process of reviewing and
analyzing a company's financial statements to make better economic decisions to earn
income in future. These statements include the income statement, balance
sheet, statement of cash flows, notes to accounts and a statement of changes in equity (if
applicable). Financial statement analysis is a method or process involving specific
techniques for evaluating risks, performance, financial health, and future prospects of
an organization.
SHARE
Types of Share
Basically there are three types of shares into which the whole capital of the company is
divided.
1. Equity shares
2. Preference shares
3. Deferred Shares
1. Equity Shares
1- Venture capital. Equity Shares are the most important and popular type of shares. It
is therefore, called a venture capital of the company.
3- Provision of long term finance. The equity shares provide long term finance to the
company.
4- No charge on the assets. The equity shares do not create any charge on the assets of
a company. The Company can raise further funds. If it desires, through mortgage of
property or other assets.
5- Payment of profit. Equity shareholders are paid profit after all the other claims are
met by the company.
6- Rate of dividend. The rate of dividend on ordinary shares depends upon the profit of
the company.
2. Preferences Shares
3. Deferred Shares
Deferred Shares are also called founders Shares. They were used to be issued to the
promoters of the company. Dividend on deferred shares was paid after the claim of all
other shareholders has been met including equity shareholders. The deferred
shareholder has one vote. These shares enabled the promoters to control the working of
the company with a very small investment.
Share Capital
The term capital usually means a particular amount of money with which a business is
started. In Indian Companies Act, it has been used in different senses in various parts of
the Act, but in general it means the money subscribed pursuant to Memorandum of
Association of the Company. Capital, in fact, represents the assets with which the
undertaking is carried on.
The sum total of nominal value of shares of a company is known as its share capital. In
case of companies, the terms ‘capital’ and ‘share capital’ have been held to be
synonymous. Capital to be stated in the Memorandum of Association and Articles of
Association of the Company.
Types of Share Capital:
Authorised/Nominal/Registered Capital:
At the time of registration of a company, the Memorandum of Association mentions the
amount of capital a company is authorised to raise from the public by selling shares
which is known as Authorised Capital or Normal Capital or Registered Capital.
It is the maximum amount of share capital that a company can issue. In the case of a
limited company, the Memorandum shall contain the amount of Capital by which a
company is proposed to be registered and the division thereof into shares of fixed
amount. In short, it is the maximum amount of capital which a company will have
during its lifetime—unless it is increased.
Debenture