Financial Statements - I

The financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting the assets, liabilities and capital as on a certain date and the income statement showing the result of operations during a certain period. Financial statements are prepared to ascertain the profits earned or losses incurred by a business concern during a specified period and also to ascertain its financial position at the end of that specified period. The objective of preparing financial statement is to present true and fair view of financial performance and financial position of the business. Users of financial statements can be classified as internal users and external users. Revenue expenditure is expenditure the benefit of which is used in the accounting year in which it is incurred. Such expenditure is shown in Trading and Profit and Loss Account. Capital expenditure is an expenditure the benefit of which is disbursed over a number of years. Such expenditure is shown in Balance Sheet. Deferred Revenue Expenditure are those expenses whose benefits extend up to more than one accounting period, but not as long as capital expenditure.

Revenue receipts are receipts which arise during the normal course of business. They are recurring in nature. They are shown in the trading and profit and loss account. Capital receipts are receipts which do not arise out of normal course of business. They are non-recurring in nature. Trading Account is prepared to ascertain the results of the trading activities of the business enterprise. Gross profit is equal to Sales minus Cost of Goods Sold. Trading Account includes sales, opening and closing stocks and direct expenses of the business. Profit and loss account is prepared to know the net profit or net loss of the business. It includes all indirect expenses and incomes. Net Profit is equal to Gross Profit – Indirect Expenses + Indirect Income. Operating profit is the excess of operating revenue over operating expenses. Balance Sheet is a statement prepared to show the financial position of the business summarising its assets and liabilities on a given date. Balance sheet can be prepared in order of permanency or liquidity.

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