Financial Statements

credit, the total of the debit balances and credit balances should agree. A detailed trial balance has columns for 

• Account name 
• Debit balance 
• Credit balance 

1.1.6 Financial Statements 

Financial statements are final result of accounting work done during the accounting period. Financial statement serves a significant purpose to users of accounting information in knowing about the profitability and financial position of the organisation. Financial statements normally include 

• Trading 
• Profit and Loss Account 
• Balance Sheet 

Trading Account 

Trading refers to buying and selling of goods. The tracing account displays the transactions pertaining to buying and selling of goods 

The difference between the two sides of the Trading Account indicates either Gross Profit or Gross Loss. If the credit side total is in excess of the debit side total, the difference represents Gross Profit. On the other hand, if the total of the debit side is in excess of the credit side total, the difference represents Gross Loss. Such Gross Profit Gross Loss is transferred to Profit & Loss Account. The Gross Profit is expressed as. 

                                   Gross Profit-Net Sales Cost of Sales 

Profit and Loss Account 

The profit and loss account helps to ascertain the net profit earned or net loss suffered during a particular period, after considering all other incomes and expenses incurred over a period. This helps the company to monitor and control the costs incurred and improve its efficiency, In other words, the profit and loss statement shows the performance of the company in terms of profits or losses over a specified period

The Net Profit is expressed as 

Net Profit (Gross Profit Other Income)-(Selling and Administrative Expenses Depreciation + Interest + Taxes Other Expenses)

 A key element of the Profit and Loss Account, and one that distinguishes it from a balance sheet, is that the amounts shown on the statement represent transactions over a period of time, while the items represented on the balance sheet show information as on a specific date



All revenue and exp Revenue and Expenses period ense accounts are closed once the profit and loss account is prepared. The accounts will not have an opening balance for the next accounting period

Balance Sheet 

The Balance sheet is a statement that summaries the assets and liabilities of a business. The assets over liabilities is the net worth of a business. The balance sheet provides info excess of nation that helps in assessing 

• A company's Long-term financial strength 
• A company's Efficient day-to-day working capital management 
• A company's Asset portfolio 
• A company's Sustainable long-term performance 

The balances of all the real, personal and nominal (capital in nature) accounts are transferred from trial balance to balance sheet and grouped under the major heads of assets and liabilities The balance sheet is complete when the net profit/ loss is transferred from the Profit and Loss account 

1.1.7 Transactions 

A transaction is a financial event that takes places in the course or furtherance of business and effects the financial position of the company, For example, when you deposit cash in the bank your cash balance reduces and bank balance increases or when you sell goods for cash, your cash balance increases and your stock reduces 

• Transactions can be classified as follows: 
• Receipts-cash or bank 
• Payments-cash or bank 
• Purchases n Sales 

1.1.8 Recording Transactions

The important aspect of accounting is to record transactions promptly and correctly to ascertain the financial status of a company as on a particular date. 

Generally, the business transactions may be of the following nature 

• Purchase of goods either as rew materials for processing or as finished goods for resale
• Payment of expenses incurred towards business 
• Sale of goods or services 
• Receipts (in Cash or by Cheques) 
• Payments (in Cash or Cheques) 

The Accounting information is useful to various interested parties, both internal and external viz. 

• Suppliers, who supply goods and services for cash or on credit 
• Customers, who buy goods or services for cash or on credit  
• Employees, who provide services and wages. 
• Banks, with whom accounts are maintained 
• Suppliers of equipment, buildings and other assets needed to carry on the business 
• Lenders from whom, you borrow money to finance your business 
• Owners, who hold a share in the capital of your business 

Points to Remember

Accounting is a comprehensive system to collect, analyse and communicate financial information 
Double Entry accounting is a system of recording transactions in a way that maintains the equality of the accounting equation 
The three types of accounts maintained for transactions are real accounts, personal accounts and nominal accounts.
Entity is the organisational unit for which accounting records are main tained 
Journal entry is a record single business transaction. 
Voucher is a document evidencing the details of a financial transaction. 
Ledger is a book in which accounts are maintained. 
Trait balance is a list of the balances of all the ledger accounts o 
Profit and loss statement shows the performance of the company in terms of profits or losses made by it over a specified period. 
Balance sheet gives an overview of the financial position of a company as on a specific date.