Financial Accounting - I – MGT101 VU

Lesson # 29

PRESENTATION OF FINANCIAL STATEMENTS

Profit & Loss Account

Standard format of profit & loss account is shown as follows:

Particulars Amount Amount

Rs. Rs.
Sales X
Less: Cost of Goods Sold (x)
Gross Profit X
Less: Administrative Expenses
Selling Expenses X
X (x)
Operating Profit X
Less: Financial Expenses (x)
Add : Other income

Profit Before Tax X

Less: Tax (x)
Net Profit After Tax for the Year X
Other income

Sales

Sales as we know are the revenue against the sale of the product in which the organization
deals. In case of a service organization, there will be Income against Services Rendered instead
of Sales and there will be no Cost of Sales or Gross Profit.

Cost of Goods Sold/Gross Profit

Cost of goods sold is the cost incurred in purchasing or manufacturing the product, which an
organization is selling plus any other expense incurred in bringing the product in salable
condition. Cost of goods sold contains the following heads of accounts:

o Purchase of raw material/goods

o Wages paid to employees for manufacturing of goods
o Any tax/freight is paid on purchases
o Any expense incurred on carriage/transportation of purchased items.

Gross Profit = Sales – Cost of goods sold

Other Income

Other income includes revenue from indirect source of income, such as return on investment,
profit on PLS account etc.
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Administrative Expenses

Administrative expenses are the expenses incurred in running a business effectively. Main
components of this group are:

o Payment of utility bills

o Payment of rent
o Salaries of employees
o General office expenses
o Repair & maintenance of office equipment & vehicles.

It is important to distribute expenses properly among the three classifications i.e. Cost of Goods
Sold, Administrative Expenses and Selling Expenses to present the financial statements fairly.
Take the example of following costs:

o Salaries and Wages

o
ƒ Although both these terms mean remuneration paid to labor and
employee against services.
ƒ Wages usually denotes remuneration paid to daily wages labor. Whereas
salary denotes payments to permanent employees.
ƒ Salaries can be classified in any of the classifications mentioned below.
• Salaries / wages paid to labor and supervisors/officers working
for the manufacturing of goods become a part of Cost of Goods
Sold.
• Salaries and benefits of general administrative staff becomes part
of Administrative Expenses
• Salaries and benefits of sales and marketing staff become part of
selling expenses.

Other expenses like Depreciation, Utilities and Maintenance can also be classified in all three,
depending upon the exact nature of the expenditure.

Selling Expenses

Selling expenses are the expenses incurred directly in connection with the sale of goods. This
head contains:
o Transportation/carriage of goods sold
o Tax/freight paid on sale

If the expense head ‘salaries’ includes salaries of sales staff, it will be excluded from salaries &
appear under the heading of ‘selling expenses’.

Financial Expenses

Financial expenses are the interest paid on bank loan & charges deducted by bank on entity’s
bank accounts. These are shown separately in the Profit and Loss Account. These include:

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Financial Accounting - I – MGT101 VU
o Interest on loan
o Bank charges

There is, however, one exception and that is the interest paid on loan taken to build an asset is
capitalized as cost of the asset up to the time that asset is completed.

Income Tax

Different types of entities have to pay income tax at different rates. At the time of preparing
annual financial statements, an estimate of expected tax liability is made. A provision is then,
created equal to that estimate.
You should remember the treatment of Provision for Doubtful debts. Same is the case with
income tax i.e. provision is made at the time of preparing accounts which is then adjusted
accordingly at the time when actual tax expense is known.

Balance Sheet (Asset Side)

Standard format of the balance sheet is given as follows:

Particulars Amount Rs. Amount Rs.

Assets
Non Current Assets
Fixed Assets X
Capital Work In Progress X
Deferred Costs X
Long Term Investments X

Current Assets
Stocks X
Trade debtors and Other Receivables X
Prepayments X
Short Term Investments X
Cash and Bank X
Total X X

Fixed Assets

• Fixed assets are the assets of permanent nature that a business acquires, such as plant,
machinery, building, furniture, vehicles etc.
• Fixed assets are presented at cost less accumulated depreciation OR revalued amount.

Capital Work In Progress

If an asset is not completed at that time when balance sheet is prepared, all costs incurred on
that asset up to the balance sheet date are transferred to an account called Capital Work in
Progress Account. This account is shown separately in the balance sheet below the fixed
assets. Capital work in progress account contains all expenses incurred on the asset until it is
converted into working condition. All these expenses will become part of the cost of that asset.
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When an asset is completed and it is ready to work, all costs will transfer to the relevant asset
account.

Deferred Costs

An expense that has a future benefit in excess of one year and recorded in a capital asset
account

Long Term and Short Term Investments

Where a business has surplus funds, it is better to invest those funds where these can generate a
return greater than PLS accounts. These investments can be of different types e.g. shares of
other companies, fixed deposits with banks, government securities, national savings etc. or
presentation purposes, these Investments are classified in two categories, long term and short
term investments. Investments made with the intention that they will be held for a period longer
than twelve months are classified as long term and those made for a period equal to or shorter
than 12 months are classified as short term.

Following things are important to note here:

• Classification is to be made every time a balance sheet is prepared and the period is to
be calculated from the date of balance sheet.
• This means that an investment made for 2 years on May 2000 will be classified as long
term investment in accounts prepared on Jun 30, 2000 and the same investment will be
classified as current investment in the accounts prepared on June 30, 2001.
• An investment may initially be made as current investment. Subsequently, if it is
decided to hold it for a longer period, then its classification will have to be changed
accordingly and vice versa.
• Therefore, investments are checked for classification every time a balance sheet is
prepared and presented accordingly.

Current Assets

Current Assets are the receivables that are expected to be received within one year of the
balance sheet date. Debtors, closing stock & all accrued incomes are the examples of Current
Assets because these are expected to be received within one accounting period from the balance
sheet date.

It is important to note that assets and liabilities are presented in the balance sheet in the order of
their maturity i.e. assets / liabilities having longer life are presented first and assets / liabilities
having shorter life are presented later.

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