1. Grand Finale

2. Financial Statements RAHUL JAIN (Striving for excellence) BCOM (H), MBA, FCS

3. Learning Objective To prepare Financial Statements

4. Diamond Rules Credit The nature of an action to an account to indicate an increase (liabilities, equity, and revenue) or decrease (assets, expenses, and dividends); Remember the CLIC rule –Credit all Increase in Liabilities, Income and Capital Debit The nature of an action to an account to indicate an increase (assets, expenses, and dividends) or decrease (liabilities, equity, and revenue); Remember the DEAD rule- Debit All Increase in Expenses, Assets and Dividend

5. The Financial Statements are designed to measure different aspects of the business The Balance Sheet The Balance Sheet Is a picture of the tree (fruit, branches, trunk & roots) at a certain point in time. It includes assets (inventory of goods and producing assets) and financing sources (equity, debt and reinvestments from net income) of the business. The Income Statement The Income Statement Accounts for all activities involved in the operation of the business (growing and selling the fruit) over a period of time. It contains a list of all operating expenses and revenues of the business.

6. Usefulness of Income Statement 1.Evaluate the past performance of the enterprise. 2.Provide a basis for predicting future performance. 3.Help assess the risk or uncertainty of achieving future cash flows. 6

7. Limitations of the Income Statement 1.Items that cannot be measured reliably are not reported in the income statement. 2.Income numbers are affected by the accounting methods employed. 3.Income measurement involves judgment. 7

8. Direct Costs These are costs which are directly related to the manufacturing or operations of the organization. For example: – Wages, Royalty, Gas, Electricity, Packing – Carriage inwards, Water, Fuel – Custom duty (Import/Export duty) – Factory overheads – Job work charges

9. Income statement Part-I -Trading Account The trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year. The net result is Gross Profit or Gross Loss

10. Trading A/c Trading A/c ParticularsDr.ParticularsCr. To Opening Stock 65,590 By sales 550,900 To Purchases 466800 To Direct Cost + 50,310 5,17,110 By closing stock 55,110 To Gross profit c/d 32,310 6,15,0106,15,010

11. Income statement – Part II Profit and Loss account Show whether a business has made a PROFIT or LOSS over a financial year. All the indirect expenses are deducted to arrive at Net Profit or Net Loss The net result is Net Profit or Net Loss

12. Indirect Costs This will include following: – Salary, Interest – Trade expenses, Printing – Advertising, Depreciation – Bad debts – Discount, Insurance – General Expenses – Repairing, Travel Expenses

13. Profit & Loss A/c Profit & Loss A/c To salaries 11,010 By gross profit b/d 32,310 To Rent 2,250 By Discount 11,250 To General expense 17,470 By Commission received 27,990 To Bad debts 11,890 By Profit on consignment to A &co. 19,080 To Advertisement 7,500 To int. on loan 3,000 To Net profit c/d 37,510 90,63090,630

14. Assets Current assets Cash Bills receivables Accounts receivable Inventory Prepaid expenses Other Current Assets Fixed Assets Building Land Machinery Long term Investments Intangible assetsLiabilities Current liabilities Bills payable Creditors Expenses Outstanding Long-term liabilities Loan Bonds payablesEquity Capital Retained earnings Balance Sheet Classifications

15. BALANCE SHEET AS ON 31 ST DECEMBER 1995 LIABILITIESAMOUNTASSETSAMOUNT CAPITAL 119990 -Drawings 19170 +Net Profit 37510 CREDITORS BILLS PAYABLE LOAN1383301950705409075000500000 BILLS RECEIVABLE DEBTORSCASHBANKSTOCK1301402615809605221055110500000