Financial Statement and Depreciation
ppt on financial statements and depreciation breifly described............ thanks to my teammates in making this presentation
Published on: Mar 3, 2016
Transcripts - Financial Statement and Depreciation
• What are Financial Statements?
Financial statements are those statements which
provide information about the profitability & the
financial position of a business.
The term ‘Financial Statements’ includes two
statements which are as under:
Income Statement i.e. Trading & Profit & Loss A/C.
Financial Position i.e. Balance Sheet.
So, financial statements provide a summary of the
accounts of a business enterprise.
The main objectives of preparing a trial balance
• To prepare a true & fair view of the financial
performance (i.e. profit/loss) & position (i.e.
assets/liabilities) of the business.
• To communicate the meaningful information to
different stakeholders in the business so that
they can make informed decisions.
Information provided by FINANCIAL STATEMENTS is
used by the management, investors, creditors,
employees, government etc. The utility of financial
statements to different parties are:
Employees and Trade Unions
From Trial Balance. Final Accounts include
the preparation of :
1) Trading and Profit & Loss account and
2) Balance Sheet
as these two statements are prepared to
give the final results of the business, both
of these are collectively called as final
accounts. Accounting cycle finally ends
with these statements as shown in next
Entry in the books of
Posting in the concerned
Preparation of final accounts
Balancing of Real &
Types of Financial Statement
Final accounts or financial statements can
be divided in two parts:-
1) Trading and Profit & Loss Account
2) Balance Sheet
Trading account is prepared by trading
concerns i.e., concerns which purchase
and sell finished goods, to know the gross
profit or gross loss incurred by them from
buying and selling of goods during a
particular period of time. Gross profit or
gross loss is the difference between the
cost of goods sold and the proceeds of
their sale. If the sale proceeds exceed the
cost of goods sold , gross profit is made.
Otherwise,gross loss is made.
1. It provides information about Gross Profit and Gross
2. It provides information about the direct expenses
3. Comparison of closing stock with those of the
4. It provides safety against possible losses
1. Purchases Returns Account is closed by transferring its
balance to Purchases Account.
2. The Sales Returns Account is closed by transferring its
balance to the Sales Account.
3. Closing Entry for those accounts which are to be
transferred to the Dr. side of the Trading Account.
4. Closing Entry for those accounts which are to be transferred
to the Cr. side of the Trading Account.
5. The credit side of the Trading Account exceeds the debit,
the difference will be Gross Profit. The Gross profit will be
transferred to the credit of a newly opened account called
Profit and Loss Account.
6. The debit side of the Trading Account exceeds the credit,
the difference will be Gross Loss. It will be transferred to the
debit of P & l a/c.
Ascertainment of Cost of Goods Sold
Opening Stock ……….
Add: Purchases …….
Less: Purchase Return ……. ………
Goods Available for Sales
Add: Direct Expenses ……….
Less: Closing Stock
Cost of Goods Sold ……….
Specimen Proforma of Trading Account
Dr Trading Account of …….. For the year ending……... Cr
To Opening Stock
Wages & salaries
Fuel & power
Coal, water & gas
By Closing Stock
By Gross Loss c/d*
Factory Rent, Rates,
Foreman/ Works Manager’s
Royalty on manufactured
To Gross Profit c/d*
Profit and Loss account shows the overall result of
business operations i.e., the net profit earned or net loss
incurred during an accounting period.
IMPORTANCE OF IT ARE AS FOLLOWS:-
To ascertain the Net profit or Net loss
Comparison with the previous year’s profits
Control on expenses
Helpful in the preparation of Balance Sheet
For the preparation of Profit and Loss Account the items
written in the Debit Side are Gross Loss, Office and
Administrative Expenses, Selling and Distribution Expenses,
For the preparation of Profit and Loss Account the items
written in the Credit Side are Gross Loss, Other Income and
CLOSING ENTRIES RELATING TO IT
1. The amount of expense and losses are transferred to the debit
Side of Profit and loss account.
2. The amount of income and gains are transferred to the credit Side
of Profit and loss account.
3. For the transfer of the credit balance of Profit and Loss a/c are
known to be net profit.
4. For the transfer of the debit balance of Profit and Loss a/c are
known to be net loss.
PROFIT AND LOSS ACCOUNT
(for the period ending on xxx)
Particulars Amount Particulars Amount
Proforma of Profit & Loss Account
To Gross Loss b/d
To Selling &
To Net Profit
By Gross Profit b/d
By other expenses
By Net Loss
(transferred to capital
Operating Profit:-It is the profit earned through
normal operating activities of the business. They include
office and administrative expenses and selling and
Operating profit=Gross profit-Operating expenses
Net Profit:-It means the excess of all revenues over all
expenses and losses of a business enterprise. They include
interest on loan,charities and donations,etc.
Net profit=Operating profit - Operating expenses
+ non operating income
Balance Sheet is a component of financial
statements which shows balances of capital,
liabilities & assets. All nominal accounts are
closed by transferring these to Trading & Profit
& Loss Account. Only personal & real accounts
Balance Sheet is the final phase in accounting
cycle. It is a ‘mirror’ which reflects the true
position of the assets & liabities of the business
on a particular date.
“A statement of financial position of economic
unit disclosing as at a given moment of time its
assets, liabilities & ownership equities. Eric
• Fixed Assets
• Current Assets
• Liquid Assets
• Fictious or Nominal Assets
• Wasting Assets
• Tangible and Intangible
• Fixed or Long term
• Current or Short term
• Contingent Liabilities
Balance Sheet as on ……………………
Add: Net Profit
Long term loan
Short Term Loans
Land and Buildings
Plant & Machinery
Patents & Trade Marks
Cash at Bank
Cash in hand
GROUPING AND MARSHALLING OF ASSETS AND LIABILITIES
The assets and liabilities shown in the balance sheet are properly grouped and
presented in a particular order . The term “grouping” means showing the items of
similar nature under a common heading.
“Marshalling” is the arrangement of various assets and liabilities in a proper order . it
can be done in any of the following two ways:-
1.In the Order of Liquidity:
According to this method , an asset which is most easily convertible into cash such as
cash in hand is written first and then will follow those assets which are comparatively
less easily convertible , so that the least liquid asset such as goodwill , is shown last.
In the same way , those liabilities which are to be paid at the earliest will be written
first . In other words , current liabilities are written first of all , then fixed or long-term
liabilities and lastly , the proprietor’s capital.
2.In the Order of Permanence:
This method is exactly the reverse of the first method discussed above. Assets which
are most difficult to be converted into cash such as Goodwill are written first and the
assets which are most liquid such as Cash in hand are written last . Similarly, those
liabilities which are to be paid last, will be written first . In other words , the
proprietor’s capital is written first of all, then fixed or long term liabilities and lastly ,
the current liabilities.
Depreciation refers to two
very different but related
1) the decrease in value of assets
(fair value depreciation), and
2) the allocation of the cost of
assets to periods in which the
assets are used (depreciation
with the matching principle).
In determining the profits (net
income) from an activity, the
receipts from the activity must
be reduced by appropriate
costs. One such cost is the cost
of assets used but not currently
consumed in the activity. Such
costs must be allocated to the
period of use. Depreciation is
any method of allocating such
net cost to those periods
expected to benefit from use of
the asset. The asset is referred
to as a depreciable asset.
Depreciation is a method of
allocation, not valuation.
The straight-line method is the most
straightforward method of Asset Value
1) Not all equipment deteriorates equally e.g. a
car, over its useful life.
2) Methods based on actual usage: total life are
too cumbersome to be practicable
• Written down value, applicable to machines that have
high rates of depreciation in the initial year or two,
and later taper it e.g. a car, is a usable method.
• Under this method, depreciation is charged at a
fixed rate every year, on the reducing balance. A
certain percentage is applied to the previous year's
book value, to arrive at the current year's
depreciation/ book value, which shows a declining
balance, weighted for earlier years and lower and
lower for later years, as the machine grows older.
• Accelerates depreciation taken in early years.
Reduces the amount taken in later years. Ignores
salvage value; starts with depreciable base = asset
• Many companies choose straight-line
method for reporting depreciation to
shareholders because net income is higher
in early year.
• Because net income is lower in early years,
some companies prefer the written down
value method, especially for Income Tax
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