Financial Statements

Financial Statements • 1. Profit & Loss Account- It is prepared to ascertain the Net Profit earned or Net Loss suffered during the year. • It is prepared for a particular period, generally, a year. • 2. Balance Sheet- It shows the financial position of the business at a given date. • It is a statement showing Assets and Liabilities of the business.

Users of financial statements • 1.Management- Since Mgt. is ultimately responsible for the financial performance, they must periodically compile and interpret the statements. • 2.Employees- to know the current and future profitability and solvency of the company.

Users of financial statements • 3.Investors- A realistic estimation of the safety of the intended investment and the return expected to be earned as a result of such investments can be made. • 4.Creditors- to know the repayment capacity and the short term liquidity of the company.

Users of financial statements • 5.Lenders- Banks, financial institutions and other agencies see the profitability and long term solvency of the business. • 6.Government- to know taxable income and tax thereon.

Users of financial statements • 7.Consumers- to draw inferences about the long term viability of the firm. • Legal obligations associated with guarantees, warranties and after sales service contracts tend to establish long term relationships between business and customers.

Basic Accounting Principles • 1.Accrual Principle - Sales and profits are taken into account despite no money is actually received. • 2.Matching Principle – Matching the revenue of a particular period with cost of that period only.

Basic Accounting Principles • 3.Going Concern Principle- We presume that business concern will continue to go on. • 4.Principle of Conservatism- Revenues are to be recognized only when they are reasonably certain, and expenses are to be recognized as soon as they are reasonably possible .

Accounting Principles ( GAAP ) • 1.Money Measurement- A record is made only of information that can be expressed in terms of money. • 2.Cost Concept- All transactions are generally recorded at cost, and not at market value. • 3.Going Concern Concept- A business concern is assumed to carry on its operations forever.

Accounting Principles ( GAAP ) • 4.Time Period- Income or loss of the business is measured for a specified interval of time, called the accounting period. eg. 1 year. • 5.Consistency- Once an entity has decided on one method of accounting, it will treat all subsequent events of the same character in the same fashion unless it has a sound reason to change the method.

Accounting Principles ( GAAP ) • 6.Business Entity- When an owner brings capital into the business, the business in turn is deemed to owe the capital to the owner. • 7.Matching Concept- In order to determine the profits or losses in an accounting period, the expenses must relate to the goods or services sold during the period.

Accounting Principles ( GAAP ) • 8.Conservatism- Revenues are to be recognized only when they are reasonably certain, and expenses are to be recognized as soon as they are reasonably possible. • 9.Realization- It deals with the point in time at which revenue may be deemed to be realized or when a sale can be said to have taken place.

Accounting Principles • 10.Dual Concept- In business, funds can be raised in any of the following ways: • Additional capital • Additional loans • Earning Revenue • Making profits • Disposing some of the assets

Accounting Principles • 10.Dual Concept- Similarly, funds may be put to any of the following uses: • Purchasing of assets • Incurring operational expenses • Discharging earlier liabilities • Suffering losses.

Accounting Principles ( GAAP ) • 10.Dual Concept-The sum of Sources of Funds must equal the sum of Uses of Funds. • All increases in liabilities and reduction in assets represent sources of funds. • All increases in assets and decreases in liabilities are uses of funds.

Accounting Principles • Dual Concept- This is because, whatever funds are raised by the business, either through capital or operations or from outsiders, must be tied up in one or the other form of uses.

Accounting Principles ( GAAP ) • 11.Accounting Period- The period for which the income statement is to be prepared must be specified. • 12.Accrual Principle- Sales and profits are taken into account despite no money is actually received.

Double Entry System • All business transactions have a two- fold effect. Recording of both the aspects of a transaction is called Double Entry System of Financial Accounting. • The system records both the debit and credit aspects of a transaction, it is known as Double Entry System.

Terms in Accounting • Debit- Increasing the debt owed to us by others till we receive payment\record expenditure\reduce the debt owed to others. • Credit- Increasing the debt owed by us to others \record income \ reduce money owed to us as & when we receive payment.

Definitions • Debtors- The money that is owed to us by the customers to whom goods are sold or services are supplied on credit. • Creditors- Persons to whom business enterprise owes money for goods or services supplied by them.