1.1.b.financial Statement

TO THE SESSION ON

TO BE FACILITATED BY

MUHAMMAD MAHMOODUL HAQUE ASSISTANT GENERAL MANAGER & FACULTY MEMBER

AGRANI BANK TRAINING INSTITUTE,DHAKA

A request to you all, please.......

Introductory Talk 





How many of you are with ACCOUNTING/ COMMERCE/ BUSINESS ADMINISTRATION background? Who among you are working in bank’s Accounts Division or Credit Desk? How many of you can read FINANCIAL STATEMENTS?

Introductory Talk   



We all can read the word MANGO: But how many of us can read MANGO? Do we all equally understand what a MANGO is? How many of us really know the composition and nutritional value of a MANGO?

Introductory Talk

Introductory Talk

Introductory Talk

Discussion Points 

    

Accounting Cycle and Final Accounts Financial Statements Manufacturing Account Trading Account Profit And Loss Account Balance Sheet

er dg Le

An a ly s fi na is of st a nc ia l tem ent s

Journal

ACCOUNTING CYCLE

fin Pre an pa cia ra l s tion ta te of m en ts

l ir a T

e c n a l a B

FINAL ACCOUNT 



Final Accounts are accumulation of various accounts and statements by which it is possible to determine a) profit or loss after a certain period and b) financial position of business organization at a specific date.

FINANCIAL STATEMENTS CONVENTIONAL METHOD: Manufacturing account  Trading account  Profit & Loss account  PL Appropriation account  Balance Sheet 

FINANCIAL STATESMENTS MODERN METHOD : Income Statement  Owner’s equity Statement  Balance Sheet  Cash flow statement 

MANUFACTURING ACCOUNT 

It is prepared to identify the cost of goods produced in a specific accounting period,



It is needed only for manufacturing concerns

PREPARATION OF MANUFACTURING ACCOUNT 1. Manufacturing cost start in a number of ways:  cash payments,  incurrence of liabilities,  fixed assets depreciation, or  the expiration of prepaid expenses. 2. These costs are recorded as either,  direct materials,  direct labor, or  factory overhead costs.

PREPARATION OF MANUFACTURING ACCOUNT 4. As the resources are used up, the company transfer their costs into the Work in Process inventory account. 5. When production is completed, costs assigned to finished units, are transferred to Finished Goods Inventory Account which is an element of Trading Account at the debit side.

PREPARATION OF MANUFACTURING ACCOUNT

Manufacturing Concerned

Classified

Transferred

Trading Account

Material Inventory Account Material are purchased and other manufacturing costs incurred

Factory Payroll Account

Work in Process Inventory Account

Finished Goods Inventory Account

Factory Overhead Account

PROCESS DIAGRAM FOR COMPUTATIUON OF COST OF GOODS

Trading Account

Cost of goods manufactured involved following three steps: First Step : Computation of cost of material used. Beginning Balance: Material Inventory Tk. 17,500 Plus Material Purchased Tk. 142,600 ...................... Cost of Material available for used Tk. 160,100 Less Ending Balance: Materials Inventory Tk. 20,400 ....................... Cost of Materials used Tk. 139,700 ===========

Second Step : Computation of total manufacturing cost. Cost of materials used Plus direct labor cost Plus factory overhead cost Total Manufacturing Cost

Tk. 139,700 Tk. 199,000 Tk. 156,200 ------------------Tk. 494.900 ==================

Third Step : Computation of cost of goods manufactured. Total manufacturing cost Plus beginning balance of Work-in-Process Inventory Total costs of goods in process during the period Less Ending Balance of Work-in-Process Inventory Cost of goods manufactured

Tk. 494,900 Tk. 21,200 ...................... Tk. 516,100 Tk. 23,500 ....................... Tk. 492,600 ===========

Name Of Manufacturing Concern Manufacturing Account For the Year Ended on ...

Dr Particulars Direct Expenses Opening Inventory Raw Material Work-in-process Raw material purchased Less Purchase return

xxxx xxxx ------xxxx xxxx --------

Freight Carriage inward Import duty Dock charges Clearing charges VAT Productive wages Factory Expenses Indirect Wages Foreman's salary Supervisors salary Manager's salary & Commission Power and Fuel Manufacturing expenses Repair and Maintenance Depreciation : Factory Building Depreciation : Plant & Machinery Warehouse Expenses Factory insurance Royalty Factory rent

Taka

xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxxxx ======

Particulars

Cr Taka

Closing Inventory Raw Material Work-in-process

xxxx xxxx ------Cost of production transferred to Trading Account

xxxx xxxx

xxxxxx ======

TRADING ACCOUNT 

It is prepared to calculate the gross profit or gross loss during the related accounting period.



Trading account of manufacturing concerns are prepared after preparation of manufacturing account.

PREPARATION OF TRADING ACCOUNT OF MANUFACTURING CONCERNS The debit side of the trading account of manufacturing concern contains:  opening inventory of finished goods,  the cost of goods transferred from manufacturing account and  gross profit (where appropriate).

PREPARATION OF TRADING ACCOUNT OF MANUFACTURING CONCERNS 





The credit side contain: the sales revenue (less sales return and allowances), closing inventory of finished goods and gross loss (where appropriate)

Name Of Manufacturing Concern Trading Account For the Year Ended on ... Dr

Cr Particulars

Taka

Opening Inventory Cost of production transferred from manufacturing account

xxxx

Gross profit transferred to Profit & Loss Account

xxxx

xxxx

Particulars

Sales Less Sales Return

xxxxxx ======

Taka

xxxx xxxx ---------

Closing Inventory Gross Loss transferred to Profit & Loss Account

xxxx xxxx xxxx xxxxxx ======

•If the total of credit side is greater than total of debit side, the difference is gross profit to be reported in the debit side. •If the debit side's total becomes greater than credit side's total, difference amount is gross loss to be reported in the credit side.

PREPARATION OF THE TRADING ACCOUNT OF MERCHANDISING CONCERN Merchandising concerns buy and sell the goods that do not need further processing. The debit side of the trading account of merchandising company contain  opening inventory of merchandise,  the purchases and  all the purchase related expenses

Name Of Business Concern Trading Account For the Year Ended on ... Dr Particulars Opening Inventory Purchases Less purchase return

Taka xxxx xxxx -------

Wages Freight Special Packing Wages Import Duty Carriage Inward Clearing Charges Dock Charges Gross Profit transferred to Profit & Loss Account

xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxxxx ======

Cr Taka

Particulars Sales xxxx

xxxx Less Sales Return ---------

Closing Inventory Gross profit transferred to Profit & Loss Account

xxxx xxxx xxxx

xxxxxx ======

PROFIT AND LOSS ACCOUNT 

It is prepared to determine the net profit or loss earned by the concern in a specific period.



The credit balance of the account indicates net profit and the debit balance of the account indicate net loss.



Profit and loss account is prepared after preparation of trading account from which gross profit is taken as one of the major component in this account.

PREPARATION OF PROFIT AND LOSS ACCOUNT Debit side of the account  gross loss,  operating expenses,  general and administrative expenses,  financial expenses and losses  other non-operating expenses and  net profit

PREPARATION OF PROFIT AND LOSS ACCOUNT Credit side of the account  gross profit,  other income and  net loss

Name Of Business Concern Profit And Loss Account For the Year Ended... Particulars Operating Expenses Packing expenses Warehouse Rent Export duty Carriage outward Cost of price list Advertisement TA of Sales person Commission Salaries of salesman Discount Administrative Expenses Office expenses Office salaries Office rent Printing stationery Telephone General Expenses Financial expenses and losses Interest on overdraft Interest on loan Loss increased due to loss of Investment Loss on sale of asset Repairing Depreciation Net profit transferred to capital

Taka xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx

Particulars

Taka

Gross profit transferred from trading account Rent received Commission received Discount received Interest of bank deposit Interest on investment Profit on sale of assets Bad debts. Recovered

xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx

Net loss transferred to capital Account

xxxx

xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxxxx ======

xxxxxx ======

BALANCE SHEET 

It is a list of balances of accounts that fell in the categories of assets, liabilities, and owner’s equity.



It presents the financial position of a company at a particular point of time.

ASSETS The assets are of four categories;  Current asset  Investments  Properties, Plants, and Equipments  Intangible assets. Some company uses a fifth category called  Other Assets  These categories are listed in the order of their presumed liquidity (the ease with which an asset can be converted into cash). For example: current assets are said to be more liquid then property, plant and equipment. 

Current Assets Current assets are defined as cash or other assets that are reasonably expected to be realized in cash or sold during a normal operating cycle of a business or within one year if the operating cycle is shorter then one year.

Items of current asset Cash  Temporary investments, Accounts and note receivable,  Inventory 



 

------------------------------------------------------------------Prepaid expenses, such as rent and insurance paid for in advance, Inventories of various supplies bought for use rather than for sale.

They are an exception to the current asset defined above. These kinds of property are current in the sense that, if they had not been bought earlier, a current outlay of cash would be needed to obtain them.

They are listed in the order of the ease of their conversion into cash.

In deciding whether or not an asset is current or non-current, the idea of "reasonable expectation" is important. For example, short-term investments. As a need for cash arises, these securities will be sold to meet this need. So they are current assets. Investments in securities not to sell within the next year should be shown in the investments category of a classified balance sheet.

Investments The investments category includes assets, generally of a long-term nature, that are not used in the normal operation of a business and that management does not plan to convert to cash within the next year.

Items of investment category    



securities held for long-term investments, land held for future use, plant or equipment not used in the business, and special funds such as a fund to be used to pay off a debt or buy a building. Also in this category are large permanent investments in another company for the purpose of controlling that company.

Property, Plant, and Equipment This category includes long-term assets that are used in the continuing operation of the business. They represent: a) place to operate (land and buildings) and b) equipment to produce, sell, deliver, and service its goods. They are often called Operating Assets or Fixed Assets or Tangible Assets or Long Lived Assets.



Through depreciation, the cost of these assets (except land) is spread over the periods they benefit.



Past depreciation is recorded by the accumulated depreciation accounts.



The exact order in which property, plant, and equipment are listed is not the same everywhere in practice.

Intangible Assets Intangible assets are long-term assets that have no physical substance but have a value based on rights or privileges that belongs to the owner. Examples are:  patents,  copyrights,  goodwill franchise, and  trademarks. These assets are recorded at cost, which is spread over the expected life of the right or privilege.

LIABILITIES Liabilities are divided into two categories:  

Current liabilities Long-term liabilities.

Current liabilities These are obligations due within the normal operating cycle of the business or within a year, whichever is longer. They are generally paid with firm's current assets or by incurring new short-term liabilities.

Items of Current liabilities notes payable,  accounts payable,  taxes payable,  wages payable, and  customer advances (unearned revenues) 

Long-term liabilities Debts of a business that fall due more than one year ahead or beyond the normal operating cycle, or that are to be paid out of non current assets are long-term liabilities.

Items of Long-term liabilities : mortgages payable,  long term notes,  bonds payable,  employee pension obligations,  long term lease liabilities 

Owner’s equity The terms Owner’s Equity, Proprietorship, Capital, and Net Worth are used inter changeably. They all stand for the owner’s interest in the company.

Unlike assets and liabilities, owner’s equity section of the balance sheet will be different depending on the form of business organization viz. a sole proprietorship, a partnership, or private or public limited company.

We have shown the owner’s equity of a sole proprietorship in the balance sheet of Shafer Auto Parts Company in the next slide.  

Assets

Shafer Auto Parts Company BALANCE SHEET as on December 31, 20_ _ Taka Liabilities

Current assets Cash Short term investment Notes receivable Accounts receivable Merchandise inventory Prepaid insurance Store supplies Office supplies Total current assets Investments Land held for future use Property, Plant, and equipment Land Building Accumulated Depreciation Delivery Equipment Accumulated Depreciation Office equipment Accumulated Depreciation Total Property, Plant, and equipment Intangible Assets-Trade Mark TOTAL ASSETS

10,360 2,000 8,000 35,300 60,400 6,600 1,060 636 1,24,356 5,000 4,500 20,650 (8,640) 18,400 (9,450) 8,600 (5,000) 29,060 500 1,58,916

Taka

Current Liabilities Notes Payable Account Payable Salaries Payable

15,000 25,683 2,000

Total current liabilities

42,683

Long Term Liabilities Mortgage Payable Total Liabilities

17,800 60,483

Owner's Equity Fred Shafer's Capital

98,433

TOTAL LIABILITIES AND OWNERS EQUITIES

1,58916

The owner’s equity section of the balance sheet for a partnership is called Partner’s Equity and is much like that of the sole proprietorship. It might appear as follows:   Partner’s Equity   A.J.Martin, Capital R.C.Moore, Capital Total Partner’s Equity

21,666.00 35,724.00 57,390.00

Companies are by law separate and legal entities. The owner’s are the STOCKHOLDERS. The owner’s equity section of a balance sheet for a company is called Stockholders Equity and has two parts: 

contributed or paid-in capital and



earned capital or retained earnings.

This might appear as follows:   Stockholder’s Equity  Common stock TK 10 per value 5000 shares Tk. 50,000.00 (authorized, issued and outstanding) Paid in capital in excess of par value Tk. 10,000.00 ________ Total contributed capital Tk. 60,000.00 Retained Earnings Tk. 37,500.00 ________

As, owner’s equity accounts show the sources of and claims on assets, of course, these claims are not on any particular asset but rather on the assets as a whole.  Contributed or paid-in capital account reveal the accounts of assets invested by stockholders themselves.  Generally, contributed capital is shown on company balance sheets by two amounts: 1. The face or par value of issued stock, and 2. Amounts paid in or contributed capital of the face or par value per share. In the above illustration stockholders invested amounts equal to par value of the outstanding stock (5,000 x Tk.10) plus Tk. 10,000.00 more. 







The Retained Earnings account is sometimes called Earned Capital because it represents the stockholder’s claim to the assets earned during profitable operations and plowed back into or reinvested in company’s operations. Distribution of assets to shareholders, called dividends, reduce the Retained Earnings account balance just as withdrawals of assets by the owner of a business lower his or her capital account balance. Thus the Retain Earnings account balance, in its simplest form, represents the earnings of the corporation less dividends paid to stockholder over the life of the business.