Net profit results from the matching of expenses with revenues. Usually an Income Statement (called
Profit & Loss A/c) is prepared for the purpose. It usually consists of three parts:
 Revenue from sales
 Cost of goods sold; and
 Operating expenses.
The Profit & Loss A/c summarises the activities of an enterprise in a period by disclosing the revenues earned
and the expenses incurred. By measuring the net profit earned by a business, it indicates its degree of
operating success.
Accountants group items that appear on the financial statements into meaningful categories so that users can
understand the information with relative ease. Financial statements that contain such categories are known as
classified financial statements (multiple-step Profit & Loss A/c).
The following may be considered –
Gross Sales XXX
Less. Sales returns and allowances XX
Net sales XXX
Less. Cost of goods sold (beginning inventory + Net
purchases + Inward carriage – Ending inventory)
Gross Profit XXX
Less. Operating Expenses XX
Profit before Interest and Tax (Operating Profit) XXX
Interest expense / Interest income XX
Other non-operating income or losses XX
Profit before Tax XXX
Less. Income Tax XX
Net Profit XXX

The Balance Sheet presents an enterprise’s assets, liabilities and equity at a particular point in time. It
summarises the resources, and the claims to those resources by owners and creditors, of the enterprise on a
certain date. The items of the Balance Sheet are also classified into meaningful categories such as
Shareholders’ Funds; Loan Funds; Fixed Assets; Investments; Current Assets and Current Liabilities.
The following may be considered:
Liabilities Rs. Rs. Assets Rs. Rs.
Shareholders’ Funds: Fixed Assets:
Capital XX Gross Block XX
Reserves and Surplus XX XXX Accumulated depreciation XX
Loan Funds: Net Block XXX
Secured Loans XX Investments XXX
Unsecured Loans XX XXX Current Assets; Loans & Advances:
Current Liabilities & Provisions: Current Assets XX
Current Liabilities XX Loans & Advances XX XXX
Provisions XX XXX


The Profit & Loss A/c reports only the effects of the current operations of the enterprise on its financial
position. The Balance Sheet shows the financial position of the enterprise at the end of a period. Neither of
these statements describes the investments in assets during the period and how those investments are
financed. The Cash Flow Statements sums up the major sources of cash receipts and cash payments of
an enterprise in a period. It reports the cash effects of not only the enterprise’s operations but also its
investing and financing activities. A classified Cash Flow Statement contains the following heads for better
 Cash Flow from Operating Activities
 Cash Flow from Investing Activities
 Cash Flow from Financing Activities.