=~ Financial Statements (Without Adjustm, len 15.2 Illustration 6 Calculation of Net Sales, Net Purchases, Gross Profit and Capital Exercise ¢ Illustration 7 Trading and Profit & Loss Account Exercise 7 Illustration 8 Profit & Loss Account Exercise 8. Illustration 9 Calculation of Operating Profit and Net Profit Exercise 44 Ay Illustration 10-11 Trading and Profit & Loss Account and Balance Sheet Exercise 19, Illustration 12 Manufacturing, Trading, Profit & Loss A/c and Balance Sheet Exercise a ancial Statements Introduction to As per accounting cycle, the transactions are first recorded in journal, from where these posted to the relevant accounts in the ledger. At the end of accounting period, these aceon” balanced and a trial balance is prepared for checking out the arithmetical accuracy of posh accounts. of After preparing the trial balance, financial statements are prepared to achieve the objectiy of accountancy. A business man is interested to know the final results of the business—wheth: he has earned profit or suffered loss in that particular accounting period. Two main objective, + maintaining accounts are ; () to find out the profit or loss made by the business at the end regular periodic intervals, and i date. For achieving these objectives, the businessman prepares certain financial statements at the end of each accounting period. In order to know profit or loss earned by a firm, income statemen; or trading and profit & loss account is prepared. Balance sheet or position statement wil portray the financial condition of a firm on a particular date. These two statements i.e, ‘trading and profit & 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. Thus, final accounts include the preparation of : @) Trading and Profit & Loss Account ; and (ii “Financial statements are prepared for the purpose of presenting a periodic review or report on the Progress by the management and deal with the (i) status of the investments in the business and ; (i) results achieved during the period under review." American Institute of Certified Public Accountants _ Thus, final accounts are the means of conveying to the management, owners and interested outsiders a concise picture of profitability and financial position of the business. It is the end product of accounting process which gives a consolidated accounting information of the accounting period, after the accounting period is over. These accounts summarise all the accounting information recorded in the subsidiary books and the ledger running into hundreds or thousands of pages. The basis of preparation of final accounts is the trial balance containing debit and credit balances. These balances represent the following : Debit Balances : Assets and deferred revenue expenses to appear on the asset side of balance sheet and nominal accounts relating to expenses and losses to appear on the debit side of trading or profit and loss account. Drawings account is deducted from the capital in the balance sheet. Credit Balances : They represent capital, liabilities, and reserves to appear on the liabilities side of balance sheet. The nominal accounts relating to revenue and gains are credited to the trading and profit and loss account, as the case may be. For proper treatment of various items of trial balance while preparing the financial statements, the following rules should be followed :«balance account is recoverable to the business, it i ne of degre in any way, in that casei Se remchinery have debt balances and money can be receiv cae fue have debit balance but these ean not be realised tak ees peen paid to third parties against them. Thus, build heat ad oe he asset side of balance sheet and salary, ee * eeading or profit & loss account. BO aaa ¢ debi wie J ss paveble 10 10 he amount is payable to outsiders again i oe a en a i i H face aoc in that case it is an income of business and is to be aa in eae : es account. ‘Bank overdraft, creditors, loans etc. all have credit balances and b ae & out Diecount, dividend, rent ete. if have credit balances ave not payable by peeause the amounts received are not to be paid back. Thus Pate to PAY outsiders becauel’ | ¢ liabilities and discount, rent ete. are incomes cs pus qvordraft etc. ar’ oa = ) | Meaning of Financial Statements | inancial statemertts are the summary statements which are prepared to show periodic | ajermance of thasiness organisation and its financial position at the end of such period perforfit & Loss Account and Balance Sheet are collectively known as final accounts as aut , wer are prepare for guch purposes. In practice, however, the composition of final accounts jes according to the nature of business activity. Composition of Financial Statements | Manufacturing Organisation | | Manufacturing Ns Tring Account retain | | sumer Fig. 15.1 Composition ‘of Financial Statements of a Manufacturing Organisation On the other hand, the financial statements of a trading concern do not include the Manufacturing Account. Trading Organisation Profit and Loss Account al Statements of T1209 ‘organisation Fig, 15.2. Composition of FinancoN 15.4 Financial Statements (Without , i The financial statements of a service organisation do not include Trading Account, Service Organisation Financial Statements Profit & Loss Account | Fig. 15.3. Composition of Financial Statements of a Service Organisation Objects of Financial Statements 4 i it tements The primary objectives of preparing financial statem: @ to find out the profit or loss (financial performance) of a business durigg accounting period. i. Gi) to know the financial position (health) of a business ie., the position 9 liabilities and capital at the end of the accounting period. Basis of Accounting Used There are three bases of accounting. i.e., (a) Cash basis, (6) Accrual basis, and (¢) Hyg are: ne F assay, basis. (a) Cash Basis. Under cash basis of accounting, inflow and outflow of cash are the basis recognising incomes and expenses. It means an income is considered as earned only when ity received in cash. Similarly, an expense is considered to be incurred when it is actually paid cash, Business organisations usually do not follow cash basis of accounting. () Accrual Basis. Under accrual basis of accounting, incomes are considered in the pert in which they are earned irrespective of the fact whether cash has actually been received or nt Similarly, expenses are charged to the period in which they help in earning incomes witha considering whether cash has actually been paid or not. The business houses usually follow it basis of accounting. (c) Hybrid Basis. This basis is used where the incomes are not sure until received. Incs# of legal profession, the criminal lawyer is sure of income received during the pendency of thecst and in case the decision of the court is against the client, the balance fees becomes doubtful. # recording of incomes on receipt basis and expénses on accrual basis is called as hybrid basi \_-[L Trading Account Trading account is the first part of financial statements which shows the results of b¥™ 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 accu | general establishment charges are ignored and only the transactions in goods included.” east : : om " The purpose of trading account is to ascertain gross profit or gross loss of the busine ‘net sales’ of an accounting period are matched with the ‘cost of goods sold’. If the amou™ sales is more than the cost of goods sold, the excess is called gross profit. In contrary cost of goods sold is more than the amount of net sales, the difference is called gross los —_ |> y 7 not Adjustments) .d by the owner in the rofit added by cost of goods sold t ais? prean asticle is purchased for & 6,000 and & 100 is sto ie Boods to the gall go the seller. Ifthe seller decides it to sell for & 8,000, it mene st” of fot 6 wpe cost to fix up the selling price, 3,000, it means % 1,999 15. i, 1 aed int the profit generated from the core activi AS ie girect exPENSES. activity of the business. It gives the " count may be prepared with the following objectives : at 1 : "gross profit or gross loss. The main purpose of Preparin, i fer os eo he bases ra ees lng en ss profitloss of the current year may be compared with the figure of last year to Oe an ‘jity of the business. Gi fi enses. All the direct ex; : emmy the direct expense: ‘penses are recorded in the debit ee qo Lat Direct expenses are incurred on the purchase or manufacture of goods ta pe Pt ut oc The summary of direct expenses helps the management a he percentage on sales. The comparison of current year percentage with the last year gots Poe vital information about the increase or decrease in the amount of expenses. If peat Resory measures may be taken to control the direct expenses, : he, ‘i i i ya ake comparison of ee = trading account shows opening stock on the debit $7 dosing stock om the credit side. The comparison of opening and closing stock helps the ssn to know the increase or decrease in stock. It is important to note that to much of szzesk indents inefficiency in selling’. in 5 Zi { Tofix up selling price. The items of trading account facilitate the ascertainment of cost giv, which subsequently helps in fixing up the selling price. 4, To know the limit of indirect expenses. Indirect expenses are not shown in the tuling account. These are shown on the debit side of profit and loss account . The more the tannt of gross profit, the more is the possibility of adjusting undirect expenses out of it and fnily leaving net profit to the business. In case, gross profit is not sufficient to absorb all the indret expenses, the result will be net loss. Cost of Goods Sold (ist of goods sold in case of trading concern may be calculated as follows : z Obening Stock of goods 7 Adi:Net Purchases* v ae Expenses v ie st of total goods available for sale ~ : coe Stock of goods “ ye cost f Goods sola ev “Purchases z Ada et Purchases : @h Purch; v Total Purehen ae. ‘urchasesLess ; Purchases Return 2 Net Purchases = Gross Profit —= Net Sales** v Less : Cost of Goods Sold v z v v Gross Profit **Net Sales Credit Sales Add : Cash Sales Total Sales v Less :Sales Return v Net Sales v Mathematical Presentation of Trading Account Gross Profit = Net Sales — Cost of Goods Sold or Gross Profit = Net Sales — (Opening Stock + Net Purchases + Direct Expenses — Closing Stock) or Opening Stock + Net Purchases + Direct Expenses + Gross Profit = Net Sales + Closing Stog This equation may be presented as follows by showing the left hand side items of equig the debt side of Trading Account and right hand side items of equation on the cre «a Trading Account. Dr. Trading Account A Particulars mem Particulars = To Opening Stock By Net Sales To Net Purchases By Closing stock To Direct Expenses To Gross Prof |__|Profit and Loss Account After the preparation of trading account, the next step is to prepare profit with a view to ascertain the net profit or net loss during an accounting period. and 103s ae “The profit and loss account can be defined as. the rey an accounting period to reflect changes in various critical “A profit and loss account is an account the losses, the excess is the net profit; port that summarises the revenues and expensag areas of firm's operations". into which all gains and losses are collected. I the gains exc if the losses are greater than the gains the difference is the nets’ Carter une function of the profit and loss account is to enable the trader to ascertain the net profit or nts resulting from business transactions during a given period.” JAR, Balt Trading account simply tells about the gross profit or loss, made by a business on pun and selling of goods. It does not take into account the other operating expenses incurred by during the course of running the business. The balancing figure of trading account-—sioss oF gross loss is transferred to Profit and loss account, which is the starting point oF Preparation of Profit and loss account. That is why trading account is treated as sub-set! the Profit and loss account. Profit a inst nd loss account shows the profit and loss on ov & business man may have other sources of income, For example, be receive rent from his business properties, He may have f Some securities. He might be getting interest or dividend ascertain the true profit or loss necessary that all such expens et from such investments. In 7 A jod, which the business has made during a particular per” | es and incomes | coo hould be considered.’ Profit and loss * adand incomes and gives the net profit made or net loss suffered by a ens : uo OP ar period: : : he nominal accounts from trial balance to the profit and loss account, ing all 4 " d loss account. If credit side is more than debit side, it ie nversly, if the debit side is more than credit side, it for rohit Pir the POT os Features of Profit and Loss Account ape Toasares of Profits Loss Asrount: are the tut isa nominal account tobe prepared atthe end of the year It vections of revenue nature and does not contain items of capital nature. ram and expenses Fe! " : outstanding expenses and accrued incomes relating to current year which * nto consideration while prepaid expenses and incomes received in advance iged from it. 1 expenses paid during the previous year but related to current year and ‘ved during the previous year but related to current year. Need for Profit and Loss Account spa loss account is prepared with the aim to find out the net profit or net oss of nd We Fouting period. The following points will throw light on the need and cy bse profit and lose account : : ‘of net profit or net loss. The profit and loss account is prepared to "in the amount of net profit or net loss for a particular period of time. The net profit is sit he eaptal account, The capital is increased ‘with the amount of net profit where ena decreases the amount of capital te 2, Comparison of profits. The net profit for the current year as disclosed by profit and loss secatittmpared with the net profit of the last year. Any desine in profit is a matter of fs the management and the reasons for the variation in profits are probed. Jating to current year are to be shown in it. des al mes recei incl he profit 1, Knowledge 3, Control over expenses. The profit and loss account helps in comparing the indirect aponses of the current year with the previous year's expenses. It also establishes the rrtionship of indirect expenses with sales. If the indirect expenses have increased, necessary steps should be taken to control the expenses. 4, Future planning. On the basis of information disclosed by the profit and loss account, the future course of action may be decided by the management. . 5. Income tax. The income-tax is levied by government on the net income of the business. e net profit disclosed by profit and loss account is the basis of determining business income for nee ‘Thus, profit and loss account helps in tax assessment also. - daroahr in the preparation of balance sheet. The net profit or net loss ascertained iti it and loss account is transferred to capital account. The capital account is shown in the shee, de of balance sheet. Thus, profit and loss account helps in the preparation of balance Im Cie Portant Points Regarding Profit and Loss Account * Gross profit or gross loss :—The figure of gross profit or gross loss is brought down ieJo ‘ int. si to drawings accow emit Il direct expenses a; ys gobi penses: All ae 16a ect OXP Joss accou : DIE oft 2 nditure. All expenses in al Es These expenses are no} CoP agen purchase of machinery, f vita Sat) eB it an paid on purchase of ass po arly, CO ot to trading account or pro ol yond 0 git? Te | & rt Fy “i Spee fit al : sheild arulas'staled svthe question, , Unless charges and lighting should b Hg edotion ta lanl GBD the dob a If ihe ad be treated as expense of and loss account Bs Rent, Interest, Discount, Commission, penses and should not be debited 56 eX curred on ac, in the ‘urniture ete, Agg, et, or ing e debited to DP or credit bal the bi Uisition of eapit shown an tallation, expenses should be and loss account, Insurance, rent, rates and taxes, commission, rofit and loss accouns, lance of the following usiness and. accor accounts, the ‘dingly del bited to profit Specimen of Profit and Loss Account Profit and Loss Account can be Prepared either Dr. The horizontal format of a Profit and Loss Acco in horizontal format or vertical format. unt is given below : Profit and Loss Account of M/S...... for the Year Ended Cr. Pariculars a Partculars Areont i Twos Lossbd By Gross Proftbid = Of & Management Expenses : By Interest received ToOfee Saat salaries! By Commission received Sdatis and wagesindiret salaries By Discount received TotseaneOtice insurance By Dien reeked ToRety ates & taxes By Apprenticeship premium ToPinin& stationery By Bad debts recovered ToEtietainment expenses, By Sale of old news papers ToAudtices By Prof on sale of xed assets Set tomas By Interest on drawings Tole charges By Sundry receipts TPatage By Net Loss Teen, Telex, Fax, Pager (transferred to capital account) Tog Pane, E-mail Charges ro Tota 28 expenses 10k Expenses we teatng. cooing lighting expensesSelling and Distribution Expenses To Advertisement To Salaries and commission of sales department To Show room rent To Show room lighting To Show room insurance To Travelling expenses To Free samples To Commission on Sales To Delivery van expenses To Cost of printing Catalogue To Bad debts To Provision for doubtful debts To Export duty To Transit insurance on goods sold To Carriage outward To Packing Charges (indirect) To Brokerage To Stable expenses To Godown rentWarehouse rent To Depreciation on showroom building To Forwarding charges (indirect) To Sales promotion expenses Financial Expenses : To Interest on loan To Bank charges To Interest on capital To Discount allowed To Commission paid for raising loan Repairs & Depreciation : To Repairs to furniture To Repairs to machinery To Repairs to building To Depreciation on furniture To Depreciation on machinery ‘To Depreciation on building Losses and Miscellaneous Expenses : To Charity To Donations To Gifts & presents To Diwali poojan expenses To Loss on sale of fixed assets To Loss of stock by firefthett To Fines and penalty To Employees welfare expensescoma format of js cwithout Adjustments) Profit and Loss i} and 1 , , n 's Account is given is given bel low. Th is. ton ijpokasset, BUCH yest To erence Between Trading Account and Profit & Loss Account ane Account and Profit & Loss Account are two complementary parts of the final ants of @ trading concern. Both of these relate to specific period, and only the revenue sits and expenses D sm each other as follows + ertaining to concerned period are included in them. However, they differ No. | Trading Account Profit and Loss Account Trading Account is prepared to find out the trend of the ‘business for a period, Trading Account is prepared before preparing the Profit and Loss Account. Purchases, sales, stock and expenses incurred in tyinging the goods in a saleable condition are taken into consideration while preparing a Trading Account. Thus, iteonsiders only direct expenses and incomes. The Trating Account shows gross proft or gross loss. ‘The Trading Account reflects efficiency in purchase and sales only. ‘n error in Trading Account will affect the Profit and ‘Loss Account, ‘The resuts disclosed by Tracing Account are partial Le. Sn trading only, |_complete andfina ________] The Profit and Loss Account is prepared to know the ultimate result of the business for a period. Profit and Loss Account is prepared after preparing the Trading Account The Profit and Loss Account considers all indirect ‘expenses, losses, incomes and gains and the balancing figure (Gross Profit or Gross Loss) of Trading Account. Profit and Loss Account shows net profit or net loss. Profit and Loss Account reflects all-round efficiency of business as a whole. ‘An error in Profit and Loss Account has no effect on ‘Trading Account. “The results disclosed by Profit and Loss Account are complete and final15.26 Financial Statements (Without (@) | The Trading Account does not start with the balance of | ‘The Profit and Loss Aca Se o any other account. Trading Account OU Slate ig (9) | The balance of Trading Account is Transferred to Profit | The balance of ce of Profit and and Loss Account. roperitor's Capital Account, . I ey Dinfatoh Rec EEE mt, Difference Between Gross Profit and Net Profit ‘| Gross Profit and Net Profit are calculated with different objectives ino; necessary to make a distinction between these two. VIEW. Honey iy S.No. Gross Profit Net Prof (1) | Gross Profits the excess of sale proceeds over the cost of | Net Profit is the excess of gross pra ) goods sold, ‘expenses and losses, roland incre | 2) | Gross Profits revealed by Trading Account, Net Profs disclosed by Profit nd Les eon 4 (8) _ | Gross Profits transferred to Profit and Loss Account Net Profi transferred to the propor ca fo Profit and Loss Appropriation Acco Arr partnership fim or company. Mth cay (4) | While calculating gross profi indirect expenses and | While calouatng net prof, indirect expenses incomes are not considered. are taken into consideration, 5 ie, (©) _| Gross Profs intuenced by the valuation of unsold stock. | Net Profi influenced by valuation ol te ase, {tis not influenced by the valuation of other assets. : (6) | Gross Profit is only a ‘book prof. It is not available for | Net Proftis a real surplus available for dstbuton, distibution, (7) | Gross Profit does not indicate the maximum limit of | Net Profit indicates the maximum limt of gems: permissible drawings from business by the proprietor. ‘drawings from the business by the propitr, | (8) | Gross Profit is used to measure the trend of business | Net Profit is used to measure the etum on cai operations by expressing the sum as a percentage on sales. in the business by expressing the same as aperenze capitalVv ts (Without Adjustments) ment rate! Bad Debis Recovered Telephone Expenses Rent Advertisement Wages Donation “ron 31% March, 2018 was € 24,000, 0 ing 8 ned by it (ie., asset: et wes of capital) and to the outs: ft wrilities) a position statement or balance sheet is Prepared. A balance Me lar point of time. It means the balance sheet discloses the asset: mi the total claims of outsiders and owners Against these assets at a particular point of time, fhesutt of liabilities and capital should be equal to assets. We recall t secounting equation is : Assets = Liabilities + Capital ‘The difference between assets and liabiliti ae more than the liabilities, the business is said to be solvent. In contr: liabilities i.e., amount payable to outsiders insolvent, It means assets are insufficient t proprietor. The balance sheet or position stat ie, Assets = Liabilities + Capital. This equ: transaction will change the composition of the accounting equation may Previous transactions to the di Definitions Balance Sheet is the final hase in accounting cycle. It is a 'mirror' which reflects the true Wsitio of the assets and Habilities of the business on a particular day. 7 1 | ay — Ta a aaa it sertain a ‘A Balance Sheet is an item-wise list of assets, liabilities and proprietorship of a business a eta " ce 2 ii the economic rang, Belence Sheet, sametimss called the étatoment of financal positon, shows tt | “EES Of the business at a point in time and the sources of these resources at a pol tement is based on fundamental accounting equation ation is also called ‘Balance Sheet Equation’. f equation. Thus, be considered a ‘document! late of balance sheet. Asingle the balance sheet which represents reflecting the summary effect of all the Smith and Keith | it iyen moment of time its axee Stement of Financia position of any economic unit eisclosing as at a o¥@n MOET T Oh? | » its liabilities, and its ownership equities." editors and which reports the wned by the enterprise and the | .d by the enterprise an t a t is a statement which the property value © y 7 —— ‘owners against these properties.” Howard and UptonFinancial Statements (Withoy 15.38 tt Aen, Characteristics of Balance Sheet ) gare the main characteristics of balance sheet : The followin: 1. Statement. yeen closed. It is edit side. "To! an hee 2, Static. Balance sheet is a static document because it is prepared on a parti hows the financial position of the business on a particular date. 3, Assets and liabilities. Balance sheet shows all the assets on one side and liabiti, pital on the other side. All debit balances (in real accounts and personal accounts) arg °° ®M n the asset side, while all credit balances are shown on the liabilities side (with the exo Med vrovision for doubtful debts, provision for discount on debtors, provision for depreciation, 2 tion og 4, Knowledge of financial position. Balance sheet shows the financial ositie te) uusiness. One can ascertain the solvency, liquidity and financial soundness of the business i he aid of balance sheet data. 35 With Balance sheet is a statement of balances of those accounts w) ‘sot a ledger account, therefore, this statement does not have d 'By' words are not used in the balance sheet. hich }, debit side 4 In MO date ‘jes in Trial Balance and Balance Sheet Similar A trial balance has following similarities with balance sheet : 1. Both trial balance and balance sheet are prepared with the help of balances drawn ledger accounts. rom 2. Both trial balance and balance sheet are statements and not ledger accounts. 3, Both trial balance and balance sheet are prepared on a particular date. 4. Both trial balance and balance sheet do not use the words 'To! and 'By'. 5. Trial balance and balance sheet do not record those ledger accounts which do not have any balance. The accounts having debit or credit balances are only dealt in these tmy two statements. Difference between Trial Balance and Balance Sheet ‘The following are the differences between trial balance and balance sheet : Basis of Difference Trial Balance Balance Sheet Object ‘The purpose of preparing the trial balance is to ¢ The main object of preparing the bare i check the arithmetical accuracy of accounts | sheet is to know the financial poston Ve books. business. Period ‘* Trial balance may be prepared at regular| © Balance sheet is generally prepared athe / intervals e.g. monthly, quarterly. end of accounting period. Closing Stock ‘© Closing stock is generally not shown in the trial | «Closing stock is alivays shown on the as balance. However, if it is adjusted with | side of balance sheet. Purchases it may be shown in trial balance. Types of . ial balance is a lst of real, personal and» In balance sheet, only personal an Account nominal accounts, accounts are shown. Sides + Tialbalance has two sides Le, debit and credit | » Balance sheet has two sies ie» and labilites. Analysis * Trial balance does not help in the analysis of | « Balance sheet is of great use (0 analyse financial statements, financial position of business.The preparation of trial balance is not compulsory. Trial balance is not a part of published accounts. ‘Trial balance can not be used as evidence in the court. Trial balance is not of any use for the outsiders, Opening stock is shown in the trial balance. There is no order for writing the items in trial balance. ifference between Profit & Loss Account and Balance Sheet ng are the differences between profit and loss account and balance sheet : own sre 15.39 The preparation of balance sheet ie compulsory. Balance sheet is a part of published accounts in case of companies. Balance sheet may be used as documentary evidence in the court. Balance sheet is used by creditors, tax authorities, bankers,, investors,, etc. Opening stock is not shown in balance sheet. The items of assets and liabilities may be written in order of liquidity or permanence, sis of Difference | Profit & Loss Account Balance Sheet 1, joe , {Nature 4. | Types of Account 4, | Period 5 | Balancing 6 | Sides, Gross ProfitLoss * The object of preparing profit and loss account isto find out net profit or net loss. Profit and loss account is a nominal account. All expenses ate recorded its debit side while all incomes are credited to this account. To! and ‘By’ words are used here, All nominal accounts are recorded here. Profit and loss account is prepared for a particular period of time. It may be for a period of six months or one year. Profit and loss account is balanced. The difference of credit and debit is either net profit or net loss. thas two sides ie., debit and credit. To prepare the profit and loss account, the figure of gross profit or loss is must. + The object of preparing balance sheet is to ascertain the financial position of business. Balance sheet is not an account. It is a statement. To! and 'By' words are not used here. In balance sheet, real and personal accounts are recorded, Balance sheet is prepared on a particular date. Balance sheet does not show any balance. The total of assets side is always equal to the total of liabilities side. Its two sides are : assets side and liabilities side. The figure of gross profit or gross loss is not directly used in batance sheet.je no doubt kee goer’ jt suffers au ih i aye of the current assets are val ued on estimated basis, so the balance sheet is not i ne eflect the true financial position of the busin . oe 6 oMpsition 10 gy Fixed a gate. gi) Bale n comp gs beint to ase without Adjustments) arison of assets and liabilities of business on two ° pri apa dates to ascertain the certain the amount of capital employed in business, 15.41 Limitations of Balance Sheet every business prepares balance sheet at th i oe end of each accounting less, e shown in the balance sheet at original cost less depreciation up-to-the- ‘Thus, balance sheet does not show true value of assets. nce sheet can not reflect those assets which cannot be expressed in monetary terms ome skill, honesty and loyalty of workers. su jntangible assets like goodwill are shown in the balance sheet at imaginary figures | Gv) which may bear no relationship to the market value. fiassiied as under : ‘Block’. Classification of Assets spots are things of value owned.” Assets include properties, possessions or rights owned by ainess which have monetary value. The various assets shown in the balance sheet are 0 (a) Non-current assets. The assets of durable nature which are used in business and are qwired and intended to be retained permanently for the purpose of carrying on the business, guch as land, building, machinery and furniture, etc. They are also sometimes called as capital tects or fixed capital expenditures or long lived assets. Fixed assets are collectively known as Assets Non-Current Current Assets Assets | Tenge Fixed t Intangible Fixed 7 ssets "Assets Gash in Hand Furniture acocgnern cna Gash at Bank Frtures kvosimerts oon Bills Receivable right Frings Sundry Debiors ‘Trade Mark Machinery Copy right eee iy PY ig Prepaid Expenses Building eats ‘Accrued Incomes ane Franchise Short Term Investments Short Term Advances Tang Seen ang Fig. 15.4 Classification of Assets. . zi i be gible fixed assets. Those fixed assets which have physical existence and which can be : f tor Vehieh *uched are known as tangible fixed assets e.g. building, machinery, furniture, mo *. “a| —— . stg intangible fixed assets. The fixed assets which have no physical exon ana, ¢ known as intangible fixed assets e.g. goodw: not be seen or touched ar ‘M, poten Wig de Oto ae eoar they ave not fictitious assets, as they are represented by value” ete. . : Long-term Investments. It is the amount invested by the busines: fe : 8 for mo, Seaver re in shares, debentures or bonds of the companies or government. than "4 Wasting assets. Wasting assets are those fixed assets, whose value grad, Thy, aceount of use and finally, they exhaust: completely, e.g. mines, forests, lena al te wells, ete. Strictly speaking, all fixed assets except land are wasting sah! Pq’ gradually decrease in value on use. However, only mines, forests, oil wells ete ttt value, are known as wasting assets. y eth Contingent assets. Contingent assets are such assets which are not, at pre : possession of the business, but which may or may not be acquired on happenic Ue, event in future. For example, the business has claimed damages from one of ig v8 8 un matter is pending in the court. If, ultimately, the judgement is in the favour of Tri ang be entitled to receive certain amount as compensation in future. ‘These assets gn iy, vo ly, the balance sheet. Ot Sho (b) Floating or circulating assets. Those temporarily held assets which ang resale or which frequently undergo change e.g. cash, stock, stores, debtors and pil Floating assets are again sub-divided into two parts, liquid assets and non-liguid ae assets are those which can be readily converted into cash without appreciable loss, Cat and cash at bank are the examples of such assets. ink, Other assets which cannot be readily converted into cash, or not without apprecishle, called non-liquid assets e.g., stock, stores. ° (©) Fictitious assets. Those assets which are not represented by anything contre tangible. Preliminary expenses, debit balance of profit and loss account are the examples assets. These are also called as 'nominal' or imaginary’ assets. Classification of Liabilities —— Liabilities Fixed Insider Liabilities Long term Liabilities Current Liabilities Capital Debentures Bills Payable Reserves Long-term loans Sundry Creditors Public Deposits Outstanding Expense Bank Overdraft Income Received in A Fig. 15.5 Classification of Liabilities. 1. Fixed liabilities, Those obligations which are required to be paid after a very I of time, i.e., on the termination of the business are termed as fixed liabilities, The liab owner, i.e., on the termination of the business are termed as fixed liabilities, The liab owner, ie., capital is a fixed liability.erm payable Ww Next five to will me long-term loans ete, ress iiabilities. Those liabilities wh; it Payable within one ace led long-term liabilities Te n Years are cal ich are re "ie é ‘quired to be paid ide pent Hiab dare called eu aoa Paid out of current [ we correzounting period an cverdang wTee! liabilities, These ine’ bills payable oe” ae > oe term loans, as ? Outstanding expenses ae » sundry 3, 3 abilities. Se liabj)it;, 4 Sof et ingen Naga ent Tate eb he beaming stun liabiti co the hap} vent. In other word y ie Cong on th h S, they would become Ii Say contin’, provided the contemplated event Seer If it does not occur, no lability isn i? ie ee liability is not an actual liability, it is not shy ¥is incurred. in inh guch @ ‘own in the balance sheet, snte Vg in the form of a footnote. : jon iabilities. Deferred liabilities are those liabilities «1; rent d liabilities. 'S are those liabilities whi ‘thi 5 ae than one month, which are repayable within wm quid or quick liabilities. Debts which are iquid ee i a ick or liquid liabilities. They include outstan Usually, it is one: repayable within a Period e of one month are ding expenses, creditors, bi ills payable, ete Balance Sheet Formats or ‘Abalance sheet may be prepared in one of the two forms : { Horizontal (Traditional) format and (ii) Vertical format, Horizontal Format Under this format, the left hand side lists liabilities of the business as on the last day of the acounting period as well as details of its capital position: and ase of the enterprise are listed. A balance sheet is so design interest of the owner(s) in the business and its liabilities to amounts are represented by its various assets. Therefore, Pifit or net loss as disclosed by the profit and loss account. ied that it discloses the financial the outsiders — and how those the balance sheet includes the net ‘There are two ways of recording net 0 (in case of profit) or a deduction (in sole properietorship or partnership as in case of a limited company. case of loss) from the capital(s)—as in the case of firms. Alternatively, it may be shown as a separate item—, Marshalling of Balance Sheet. ‘Marshalling' denotes the se Thete are no statuto Preparation of balane Joint stock quence of assets and liabilities to be shown in the balance sheet. ry guidelines for the sequence or order of assets and liabilities for the e sheet of sole proprietor and partnership firm. In case of balance sheet of companies, there is a specific proforma prescribed by the Companies Act. Tn the absence of any statutory proforma describing the order of assets and a na fut® Sle proprietary concerns and partnership firms prepare the balance sheet aor ng iy ature of business and suitability. However, there are two prominent methods to P balance sheet of sole proprietor and partnership firms. These methods are : Permanence Method * Liquidity Method.Stange | "|. permanence Method. Under this method, assets and liabilities having high ty ‘re shown first, followed by the items having less permanence chara, ed dae saa sees erelshoera on Whe)isp/ followed bg eagea, assets, aie onal of the proprietor is shown on the top, followed by reserves, lon and ‘curcent liabilities. 2. Liquidity Method. This is the reverse of permanence method. Under assets having more liquidity are shown on the top, followed by those assets fixed assets are shown next to the current assets. Similarly, on the liabilities sia claim which is payable first in the form of current liabilities is shown on the top, term liabilities and capital. Advantages of Marshalling The main advantages of marshalling are as follows : 1. It shows the relationship between the capital and fixed assets and working capital, if any, provided by the proprietor. 2. Marshalling expresses the relationship between current assets and c The modern practice is to avoid general headings of ‘Assets’ and ‘L; arrange assets and liabilities in groups under appropri: show the amount of (1) Fixed assets (2) Current assets, and (3) Fictitio assets side and (1) Proprietors’ equity (2) Long term liabilities liabilities on the liabilities side. The arrangement of assets and liabilit comparison between different groups of assets and liabilities, __ Specimen of Balance Sheet In order of Permanence Balance Sheet of M/s J.J. Jewellers as at 3ist March, 2017 and (3) Cure: rma, = Aconggt n the Tiana! 8 term linkin il this meth, which hay, liquidity. It means cash, bank, debtors, stock and other current assets are show, is k 1 First ang i. le, the outsig,” followeq by long the amount uurrent Liabily ‘abilities’ by: ., ate headings with sub-totals », US assets on thy ities facilitates , Liabilities ‘Amount Assets z Capital. Add Net profit ‘Add Interest on capital Fixed Assets : Goodwill Land and buildings Plant and machinery Loose tools and stores Less Drawings — | Furniture, fixtures and fitings Reserves : Vehicles General reserve, etc. — | Patents, designs, etc, Fixed Liabilities : Live stock Loans (Long term) — | Investments Current Liabilities : Current Assets : Sundry creditors — | Closing stocks : Bills payable = |_ Raw materialsats (without Adjustments) reme) we =] Work-in-progress ee — |_ Finished goods es =| Stock ot (eee oes Of goods sent on consignment ( An Sundry debtors ee Bills receivable Pre-paid expenses ‘Incomes due but not received Cash-al-bank | Cash-in-hand Fictitous Assets : . Losses & expenses not writen off of Liquidity (Cash or near cash items recorded at the top) der not palance Sheet of M/s Rama Stores as at 31st March, 2017 Tebiltes ed Assets Aad z sae Current Assets : Go ei inadance — | Cashin hand i pees — | Cash at bank oe — | Short term investments ae — | Bil receivable | sry ets — | Book debts Closing stocks : | Fixed Liabilities : Finished goods | | ungtemloans — | Goods sent on consignment | Fesenes: Work-in-progress | | Gel reserve Raw materials =| |e spc reserves Pre-paid expenses - Long term investments | Capital Fixed Assets | ‘ad @) Net Profit Loose tools & stores = | Dilnerest on capital — | Live stock - {essDravings Motor vehicles i Furniture = Plant and machinery = Land & buildings as Patents " Goodwil Fictitious Assets : — — | Losses & expenses not written off [eee I “his connection, the following are the points to be noted : Assets of the same class are grouped together—all fixed assets (0 “Ssets together. gether and all currentON Tr Financial Statements (Without Adju: ety 2. The balance of the Capital Account is shown as under : ) Capital Opening balance ‘Add: Profi for the period Less : Drawings for the period Vertical Format . The balance sheet presentation used so far is known as the horizontal form, disadvantages with the above presentation is that it docs not show ont value The organisation, The net worth of an organisation to the owner is the valur of the «ot the capital. The vertical format clearly displays the net worth of the business to the owner je? capital. This format also displays the amount of investment in the fixed assets and in parte capital (which is the difference between the current assets and current liabilities). ing The vertical format merely involves reverse arrangement of the i balance sheet presented in horizontal format. Many non-accountant mai to make decisions based on accounting information. The vertical format gain a better understanding of the financial information presented therefore, improve their decision-making. The information shown previt the vertical format. information showy magers are now r, is intended to he} by the accountay iously is now pres, Tl by a edited Ip them nts ang ented in Balance Sheet of X as at 31st March, 2015 = eae ear Fixed Assets : Land 4,00,000 Building 8,00,000 Plant and machinery 6,00,000 Fumiture 2,00,000 Delivery van 4,00,000 | 24,00000 Assets: ‘Stock 3,00,000 Debtors 5,00,000 Bil receivable 1,00,000 Cash at bank 60,000 | Cash in hand 40,000 | 10,00,000 | Less: Current Liabilities : Creditors 2,00,000 Bills Payable 1,00,000 Outstanding Expenses 100,000 4,00,000 Working Capital 600,000 Net Assets Employed 30,00000 Financed by : : Capital 24,40,000 Add : Net Profit 27,00,000 Non Current Liabilities 3,00,000 30,00,000