PLUS ONE ACCOUNTANCY NOTES Chapter – 8 FINANCIAL STATEMENTS - I Capsule Notes

CHAPTER 8: FINANCIAL STATEMENTS – I – MICRO NOTES
STAKEHOLDERS & THEIR INFORMATION REQUIREMENTS
Internal: Owners (profit, ROI), Managers (planning, control), Employees (bonus, job security).
External: Investors (buy/sell shares), Creditors/Banks (creditworthiness), Government (tax, compliance), Customers (supply continuity), Researchers (analysis).
DISTINCTION: CAPITAL vs REVENUE
Capital Expenditure: To acquire fixed assets/improve earning capacity; benefit >1 year; non-recurring; shown in Balance Sheet (Asset). Examples: Purchase machinery, installation, legal fees for property.
Revenue Expenditure: To maintain earning capacity/daily ops; benefit within 1 year; recurring; transferred to Trading/P&L. Examples: Wages, rent, repairs, salaries.
Capital Receipts: Create liability or reduce asset; non-recurring; not credited to P&L. Examples: Capital introduced, loan, sale of fixed asset.
Revenue Receipts: From regular ops; recurring; credited to P&L. Examples: Sales, commission, interest received.
FINANCIAL STATEMENTS – MEANING & TYPES
Meaning: Final output of accounting process showing profitability & financial position. For sole proprietorship: Trading A/c, Profit & Loss A/c, Balance Sheet.
Exam Q (1 mark – 2022 June): Not included in Financial statements? (c) Cash Book.
TRADING ACCOUNT
Purpose: To find Gross Profit/Loss from buying & selling goods. Includes only direct expenses & revenues.
Formula: Gross Profit = Net Sales – Cost of Goods Sold (COGS).
Net Sales = Sales – Sales Returns.
COGS = Opening Stock + Net Purchases + Direct Expenses – Closing Stock.
Net Purchases = Purchases – Purchase Returns.
Debit Side (Direct Expenses): Opening Stock, Purchases (less returns), Carriage Inwards, Wages, Factory Rent, Power, Fuel, Octroi, etc.
Credit Side (Incomes): Sales (less returns), Closing Stock.
Exam Calculations (2-5 marks common): COGS & Gross Profit from given data.
PROFIT & LOSS ACCOUNT
Purpose: To ascertain Net Profit/Loss. Includes all indirect expenses & incomes. Gross Profit transferred here.
Indirect Expenses (Debit): Office (Salaries, Rent, Insurance, Printing, Depreciation, Audit fees), Selling (Carriage Outwards, Advertisement, Bad Debts, Discount Allowed), Financial (Interest, Bank Charges).
Indirect Incomes (Credit): Discount Received, Commission Received, Rent Received, Interest Received, Profit on Sale of Asset.
Net Profit = Gross Profit + Indirect Incomes – Indirect Expenses.
BALANCE SHEET
Purpose: Statement of assets & liabilities on a particular date, showing financial position. Based on: Assets = Liabilities + Capital.
Grouping: Putting similar items under common head (e.g., all fixed assets together).
Marshalling: Arranging assets & liabilities in specific order.
Order of Liquidity: Most liquid first. Assets: Cash in hand, Bank, Bills Receivable, Debtors, Stock, then Fixed Assets. Liabilities: Bills Payable, Creditors, Bank Overdraft, then Long-term Loans, Capital.
Order of Permanence: Least liquid first. Assets: Goodwill, Land, Building, Plant, Furniture, then Current Assets. Liabilities: Capital first, then Long-term Loans, then Current Liabilities.
Exam Q (1 mark – 2020 IMP): In sole proprietorship Balance Sheet, assets & liabilities usually arranged in? (b) Liquidity order.
OPENING ENTRY
Meaning: Journal entry at start of new year to bring forward balances of assets, liabilities & capital from previous year's Balance Sheet.
Entry: All Assets A/c Dr.; To Capital A/c; To all Liabilities A/c.
IMPORTANT EXAM QUESTIONS
1. Categorise as Revenue income, Revenue expenditure, Capital income, Capital expenditure: Rent paid, Machinery purchased, Commission received (3 marks – 2022 Imp).
2. Calculate COGS & Gross Profit from given data (2-5 marks – many years).
3. What is Grouping and Marshalling? Show two ways with examples (5 marks – 2022 Imp).
4. Arrange given assets in order of liquidity (5 marks – 2022 June).
5. Operating Profit = ? (1 mark – 2022 Imp): Net Profit + Non-operating expenses – Non-operating incomes.
6. Briefly explain Balance Sheet (2 marks – 2021 Imp).
7. Match the following: Sales, Carriage inwards, Rent received, Carriage outwards, Cash at bank (5 marks – 2021 Imp).