DELHI PUBLIC SCHOOL - BOPAL, AHMEDABAD

CYCLE -15 (2024- 25)

CHAPTER NAME: FINANCIAL ACCOUNTS – WITHOUT ADJUSTMENTS

CLASS: XI SUBJECT: ACCOUNTANCY
Financial Statements: Financial statement are those statements that show the profitability (Income statement
or Trading and Profit & Loss Statement) and the financial position (Balance Sheet or Position Statement) of
the business at the end of accounting period.
Financial statements include the following statements:
i. Income statement (Trading and Profit and Loss Account) - prepared to ascertain gross profit/loss
and net profit/loss during an accounting period.
ii. Statement of Financial Position (Balance Sheet) - prepared to ascertain position (assets, liabilities
and capital) of an enterprise at a particular point of time.
iii. Schedules and notes forming part of Balance sheet and Income statement - to give details of
various items shown in both the statements.
These two Financial Statements (Income Statement and Statement of Financial
Position) are termed as 'Final Accounts'.
Objectives of Preparing Financial Statements.
i. To present a true and fair view of the financial performance (Profit/Loss) of the business.
ii. To present a true and fair view of the financial position (Assets/Liabilities) of the business.
iii. Aid decision-making: Provide relevant financial information to stakeholders, such as investors and
creditors, to help them make decisions
iv. Show profitability: Help assess the profitability of the business
Capital Expenditure
The non-recurring expenditure whose benefit is derived by the business for more than a year is called Capital
Expenditure. It includes the amount spent or liabilities incurred to acquire or improve any fixed asset or
acquiring any legal rights or first-time expenses incurred to make fixed assets workable e.g. purchase of
machinery/building/furniture etc., expenses incurred to acquire Patents, Trade-marks etc. and expenditure
incurred for making an asset ready to use (like installation exp., carriage, first time expenses incurred on
second hand fixed asset for making it ready to use). Capital expenditures are recorded on the assets side of the
Balance sheet.
Revenue Expenditure
The recurring and routine nature expenditures which are incurred for operating the business smoothly and
which help to maintain business’s earning capacity, are called Revenue expenditures e.g. expenses incurred
for producing finished goods such as direct expenses, purchase of raw material and other expenses as rent,
salary, repairs etc. The benefit of these expenses last up to one year (give benefit up to one year). These
expenses are shown on Debit side of the income statement (trading and profit and loss account).
Deferred Revenue Expenditure
The expenditure which is revenue in nature, but the heavy amount spent and benefit likely to be derived over
a number of years called deferred revenue expenditure e.g. heavy expenses on advertising on launching of a
new product and hence it is capitalized like any fixed asset.
Accounting treatment of Deferred Revenue Expenditure
As per matching principle, expenses incurred in an accounting period are matched with the revenue
recognized in that accounting period. So the whole deferred revenue expenditure should be spread over the
number of years over which the benefit is likely to be derived. During the current accounting year: (a) Only
that portion of the expenditure should be charged to the profit and loss account which has facilitated the
enterprise to earn revenue during current year (b) Remaining amount of expenditure should be carried forward
to the next year and shown on the assets side of the balance sheet.
Capital Receipt
Capital receipts are those irregular receipts that don’t affect profit or loss of the business; it either increases
the liabilities (raising of loans) or reduces the fixed assets (sale of fixed assets), so they will be shown in the
balance sheet. Capital receipts are not made available for distribution as profit to the owner.
Revenue Receipt
Revenue receipts are received in the normal and regular course of business like Receipts from sale of goods
and rendering services to customers. Income from non-operating business activities like income from
investment i.e. interest and dividend received and rent received, Commission and other fees received for non-
operating business etc. These receipts increases profit and are shown on the credit side of the Trading and
Profit and Loss account.
Types of Expenses
Direct Expenses: Those expenses which are incurred on purchasing of goods and for converting the raw
materials into the finished goods e.g. Manufacturing wages, Expenses on purchases (including all duties and
taxes paid on purchases), Carriage/Freight/Cartage inwards, Production expenses (such as power and fuel,
water etc.), factory expenses (e.g. lighting, rent and rates), Royalty based on Production etc.
Note: All direct expenses are debited to Trading account.
Indirect Expenses: Those expenses which are not directly related to production or purchase of the goods are
called indirect expenses. It includes those expenses which are related to office and administration, selling and
distribution of goods and financial expenses etc. These expenses are shown on the debit side of the Profit and
Loss A/c.
Calculation of Gross Profit
Gross Profit = Net Sales - Cost of Goods Sold
*Net Sale = Total Sale - Sale Return
Cost of goods sold = Opening Stock + Net Purchases + Direct Expenses (Wages, Expenses on Purchases,
Carriage inward etc.) - Closing Stock.
Net Purchases = Total Purchases - Purchases Return
Adjusted Purchase = Net Purchases + Opening Stock – Closing Stock
Calculation of Operating Profit
Operating profit = Net sales - Operating cost OR
= Gross Profit - (Office and Administrative Expenses + Selling and distribution exp.)
Operating Cost = Cost of Goods Sold + Office and Administrative Expenses + Selling and distribution exp.
Net Profit = Operating Profit + Non-operating Income - Non-operating expenses.
Operating expenses: The expenses which are related to the main or normal activities of the business e.g.
office and Administrative expenses, selling and distribution expenses. Operating profit is also called EBIT
(Earnings before interest and taxes).
Income Statement It is divided into two pars:
1. Trading Account which shows the gross profit or gross loss.
2. Profit and Loss Account which shows the net profit or net loss.
Format of Trading Account
Name of Business Firm
Trading Account For the Year Ending…………..
Dr. Cr.
Particulars ₹ Particulars ₹
To Opening Stock ____ By Sales __
To Purchases __ Less:Returns __
Inward/Sales Returns
Less: Purchases Returns/ Returns __ ____ By Scrap sales ___
outwards
To All Direct Expenses ____ By Closing Stock ___
To Wages ____
To Wages & Salaries
To Carriage of Carriage Inwards ____
Carriage on purchases
To Direct Expenses ____
To Gas, Fuel and power ____
To Freight, octroi and cartage ____
To Manufacturing Expenses or ____
Productive expenses
To Custom or import duty ____
To Dock and clearing charge ____
To Excise duty ____
To Factory rent and lighting ____
To other direct charges ____
To Royalty ____
To Gross Profit transferred to Profit & ____ By Gross Loss transferred to (Balance
Loss A/c) Profit & Loss A/c) figure)
(Balance figure) (Balance figure)
Total XXX Total XXX
 Formal of Profit & Loss Account
Profit & Loss A/c for the Year Ended......
Dr Cr
Particulars ₹ Particulars ₹
To Gross Loss ___ By Gross Profit ___
(Transferred from Trading A/c) (Transferred from Trading A/c)
To Office & Admin. Expenses ___ By Rent Received ___
To Salaries ___ By Rent (Cr.) ___
To Rent Rates Taxes ___ By Discount Received ___
To Printing and Stationery ___ By Discount (Cr.) ___
To Salaries & Wages ___ By Rebates ___
To Postages and Telephones ___ By Commission Received ___
To Office Lighting ___ By Interest Received ___
To Insurance Premium ___ By Dividend Received ___
To Legal Expenses ___ By Bad Debts Recovered ___
To Establishment Expenses ___ By Apprentice fees or premium ___
To Audit Fees ___ By Gain on Sale of Fixed Asset ___
To Trade Expenses ___ By Miscellaneous Receipts ___
To Travelling Expenses ___ By Net Loss (If Dr. side > Cr. side) ___
(Transferred to capital Account)
To General Expenses ___
To Selling & Distribution Exp. ___
To Carriage and Freight Outwards ___
To Commission ___
To Brokerage ___
To Advertisement ___
To Publicity ___
To Bad Debts ___
To Export Duty ___
To Packing Expenses ___
To Salaries of Salesman ___
To Delivery Van Expenses ___
To Financial Exp. ___
To Interest paid on loans ___
To Interest (Dr.) ___
To Discounts (Dr.) ___
To Rebate Allowed ___
To Bank Charges ___
To Miscellaneous Exp. ___
To Repairs ___
To Depreciation on Fixed Assets ___
To Conveyance Expenses ___
To Entertainment Expenses ___
To Donations & Charity ___
To Loss on Sale of Fixed Assets ___
To Stable Expenses ___
To Loss by Fire ___
To Loss by theft ___
To Unproductive Expenses ___
To Net Profit Transferred to Capital Account ___
(If Cr. side > Dr, side)
Total XX Total XX
X X
 ● The words 'To' and 'By' are generally not used these days.
● The name of Business Firm is stated on the top of trading & P & L A/c.

Balance Sheet:

Meaning of Balance Sheet Balance sheet is a summarized statement of assets and liabilities, prepared
generally at the end of financial year to show the financial position of the business. All liabilities are put on
the left hand side of balance sheet where all assets are shown on its right hand side.

Grouping and Marshalling of Assets and Liabilities

Grouping: The term ‘Grouping’ means putting together items of a similar nature under a common heading.
For example, under the heading ‘trade Creditors’ the balances of the ledger accounts of all the suppliers from
whom goods have been purchased on credit, will be shown.

Marshalling: It refers to the order in which the various assets and liabilities are shown in the Balance Sheet.
The assets and liabilities can be shown either in the order of liquidity or in the order of permanence.

Order of Liquidity
1. The assets are arranged in the order of their liquidity i.e., the most liquid asset (e.g., cash-in-hand), is
shown first. The least liquid asset (e.g., goodwill) is shown last.
2. The liabilities are arranged in the order of timing i.e., the liabilities which are to be paid immediately
{e.g., Creditors) are shown first and which are to be paid later are shown at last (long-term loans).
A general format of a Balance Sheet in order of liquidity is shown below:
Balance Sheet of ..........
As at.............
Liabilities ₹ Assets ₹
Current Liabilities: Current Assets:
Bank Overdraft Cash-in hand
Bills Payable Cash at Bank
Sundry Creditors Bills Receivable
Outstanding Expenses Short Term Investment
Income received-in-advance Sundry Debtors
Long-term Liabilities: Prepaid Expenses
Long term loan Accrued Income
Reserve and Surplus Closing Stock
Capital: Investment: (Long term)
Add : Interest on Capital Fixed Assets:
Add : Net Profit Furniture and Fixtures
Less : Drawings Plant & Machinery
Less : Interest on Drawings Building
Less : Income Tax Land
Less : Life Insurance Premium Goodwill
Less : Net Loss

Order of Permanence: This order is exactly reverse of the liquidity order

1. The assets are arranged in the order of their permanence i.e., the least liquid asset (e.g., goodwill) is
shown first and the most liquid asset (e.g., Cash-in-hand) is shown last.
2. The least urgent payment to be made (e.g., short-term creditors) is shown last.
3. A company is required to prepare the balance sheet in the order of permanence.
A general format of a Balance Sheet in the order of performance is shown below:
 Balance Sheet of …………
As at.............

Liabilities ₹ Assets ₹
Capital: Fixed Assets:
Opening Balance XX Good will
Add: Net Profit XX Land
(Less: Net Loss) Building
Less: Drawings XX XXX Plant & Machinery
Long-term Liabilities: Furniture & Fixtures
Long term loan Investment: (long term)
Current liabilities: Current Assets:
Income received-in-advance Closing stock
Outstanding Expenses Accrued income
Sundry Creditors Prepaid expenses
Bills Payable Sundry Debtors
Bank Overdraft Bills Receivable
Cash at Bank
Cash in Hand

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