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 organization.
Financial statements normally include-
- Trading
- Profit and Loss Account
- Balance Sheet
1.12.1 Trading Account: Trading refers to buying and selling of Goods. The trading 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
1.12.2 Profit and Loss Account: The profit and loss account help 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 show 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 expense accounts are closed once the profit and loss account is prepared. The Revenue and Expenses accounts will not have an opening balance for the next accounting period.
1.12.3 Balance Sheet: The balance sheet is a statement that summarizes the assets and liabilities of a business. The excess of assets over liabilities is the net worth of a business. The balance sheet provides information 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.
