FORMAT

S FINAL
FO
ACCOUNT
R
S
 TRADING AND PROFIT AND
LOSS ACCOUNT

FINANCIAL BALANCE SHEET

STATEMNTS

CASH FLOW STATEMENT

 TRADING ACCOUNT ----MEANING

• Trading account is prepared for calculating the gross profit or gross loss arising or incurred as a result of the
trading activities of a business. In other worlds, it is prepared to show the result of manufacturing, buying
and selling of goods. If the amount of sales exceeds the amount of purchases and the expenses directly
connected with such purchases, the difference is termed as gross profit.

• On the contrary, if the purchases and direct expenses exceed the sales, the difference is called gross loss. A Trading Account
records the amount of purchases of goods and also the expenses which are incurred in bringing that commodity to a saleable
state.

• All expenses which relate to either purchase of raw material for manufacturing of goods are recorded in the Trading
Account. All such expenses are called ‘Direct Expenses’.

• According to J.R. Batliboi, “The Trading Account shows the results of buying and selling of goods. In preparing this account,
the general establishment charges are ignored and only the transaction in goods is included.” Sometimes, a Trading Account
is also called ‘Good A/c’ because all the transaction relating to goods are recorded in it. Such as (i) Opening Stock, (ii)
Purchases, (iii) Purchases Returns, (iv) Sales, (v) Sales
• Returns, (vi) Closing Stock, (vii) Expenses incurred on manufacturing of goods, and (viii) Expenses
Dr Trading a/c of sai for the year ended.. C
Particulars amount amount
r
To opening stock particulars By sales
To raw material Less: sales returns
To inventory Less: return
To semi finished inwards By closing
To opening stock
finished goods By closing inventory
To purchases/cash purchases/ credit By closing raw
purchases Less: purchases return material
Less: return By closing semi
outwards Less: finished By closing
prepaid wages To finished
direct expenses By sale of scrap
To wages By goods sold on sale
To wages & salaries
To outstanding wages
To carriage inwards
To carriage
To motive power
To factory rent &
rates & insurance
To custom duty
To clearing charges
 Cr
particular amount amoun
sTo oil, fuel, coal, gas ,water, lighting, particulars By Gross t
heating To marine insurance Loss (trf to
To royalties p&l a/c)
To octroy
To import & export duties
To manufacturing expenses
To cartage inwards
To cargo expenses
To shipping
expenses
To commission on
purchases
To railway charges
To landing & wharf
charges To excise duty
To coke, coal
To factory electricity, power
To grease, jute, cotton
To cleaning charges
To loading & unloading
charges To Gross Profit XXXX XXXX
(trf to p&l a/c) X X
 PROFIT AND LOSS ACCOUNT

• Trading account only discloses the gross profit earned as a result of buying and selling of goods. However, a
businessman has to incur a number of expenses which are not taken to trading account. Hence, a
businessman is more interested in knowing the net profit earned or net loss incurred during the year.
• As such, a Profit & Loss Account is prepared which contains all the items of losses and gains pertaining to
the accounting period. According `to Prof. Carter, “A Profit & Loss Account is an account into which all
gains and losses are collected, in order to ascertain the excess gains over the losses or vice-versa”.
 Profit & Loss a/c as on…. Cr
amount particulars
particular amoun
s By Gross Profit b/d t
To gross loss b/d By discount
To administrative exp received By interest
To salaries received By rent
To salaries & received
wages To office By commission
rent received By
To rates & rent & commission accrued
taxes To office By miscellaneous receipts /
insurance income By dividends received
To printing & By profit on sale of
stationery To office asset By bad debts
lighting recovered
To postage & By interest on
telegrams To legal drawings/investment By discounts
expenses on purchases
To audit fee By discount from creditors
To general expenses By royalty
To repairs & received By
renewals To bank sundry income
charges
 Dr Profit & Loss a/c as on…. Cr
particular amount particulars amount
sSelling and distribution
expenses
To godown rent &
insurance To packing
expenses
To advertising
To agents commission
To
commission/allowed/paid
To bad debts
To travelling expenses
To discount allowed/paid
To brokerage
To free samples
To trade expenses
To salesmen salaries
To carriage
outwards
To delivery van
expenses To
subscriptions
 Dr Cr
particular amount amount
s particulars
To conveyance
To bad debts
To manager
commission
To sundry
expenses
To loss by theft / accident /
fire To interest
To commission
To premises
By Net Loss
To Net Profit (trf to capital
(trf to capital a/c)
a/c)

XXX XXXX
X X
 Balance sheet of sai for the year ended…
liabilities amount assets amount
SHARE HOLDER FUNDS Tangible assets
Capital Land
Less: interest on drawings Buildings
Less: Machinery
drawings Plant
Less: net loss Furniture
Add: net Fittings
profit Vehicles
Equity & preference Computer
shares Reserves s
Surplus IN-
Sinking tangible
funds assets
Share premium Goodwill
Proprietor Patents
funds Copyrights
LONG TERM Trademark
LIABILITIES s License
Debentures Franchise
Long term loans, provisions
Secured loans (loans &
advances) Fixed deposits (2-8
 BALANCE SHEET

After ascertaining the net profit or loss of the business enterprise, the businessman would also like to know
the exact financial position of his business. For this purpose a statement is prepared which contains all the
Assets and Liabilities of the business enterprise. The statement so prepared is called a Balance Sheet
because it is a sheet of balances of ledger accounts which are still open after the transfer of all nominal
accounts to the Trading and Profit & Loss Account Balances of all the personal and real accounts are
grouped as assets and liabilities. Liabilities are shown on the left hand side o the Balance Sheet and assets
on the right hand side.

Definitions: A Balance Sheet has been defined as follows:

In the words of Karlson, “A business form showing what is owed and what the proprietor is worth, is called
a Balance Sheet.”

According to A. Palmer, “The Balance Sheet is a statement at a particular date showing on one side the
trader’s property and possessions and on the other hand the liabilities.”

According to J.R. Batliboi, “A Balance Sheet is a statement prepared with a view to measure the exact
financial position of a business on a certain fixed date.”
liabilities amount assets amount
CURRENT LIABILITIES INVESTMENTS
Sundry creditors Government securities
Trade creditors Investment in government bonds
Bank od Investment in shares
Creditors Trust securities
Provision for taxable CURRENT ASSETS
Proposed dividend Sundry debtors
Short term loans Debtors
Unclaimed dividends Stock / inventory
Outstanding tax / expenses / pf Cash equivalent
Md remuneration Bills receivable
Income received in advance Trade receivable
Interest accrued Accounts receivable
Bills payable Pre-paid expenses
Accounts payable Cash at bank
Trade payable Cash in hand
Loose tools
Interest accrued on investment
Bank balance
Market securities
XXXXX XXXXX
 RATIO ANALYSIS
– Measure relationships between resources and
financial flows
– Show ways in which firm’s situation deviates
from
• Its own past
• Other firms
• The industry
RATIO ANALYSIS------SIGNIFICAENCE
 How a Ratio is expressed?

As Percentage - such as 25% or 50% . For example if net profit is Rs.25,000/- and the sales
is Rs.1,00,000/- then the net profit can be said to be 25% of the sales.

As Proportion - The above figures may be expressed in terms of the relationship between net
profit to sales as 1 : 4.

As Pure Number /Times - The same can also be expressed in an alternatively way such as the
sale is 4 times of the net profit or profit is 1/4th of the sales.
 CURRENT RATIO

1. Current Ratio : It is the relationship between the current

assets and current liabilities of a concern.
Current Ratio = Current Assets/Current Liabilities
If the Current Assets and Current Liabilities of a concern
are Rs.4,00,000 and Rs.2,00,000 respectively, then the
Current Ratio will be : Rs.4,00,000/Rs.2,00,000 = 2 : 1
ACID TEST OR QUICK RATIO
ABSOLUTE LIQUIDITY TEST OR CASH
RATIO
 TIME VALE OF MONEY
•Meaning:
•The time value of money (TVM) is the idea that money available at the present time is worth more than the same
amount in the future due to its potential earning capacity.
• This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the
sooner it is received.
•It can be used to compare investment alternatives and to solve problems involving loans, leases, savings.
•TVM help us in knowing the value of money invested.
•As time changes value of money invested on any project/ firm also changes.
 REASON FOR TIME VALUE OF MONEY
1. Risk and Uncertainty:
No certainty for future cash inflows.
2. Inflation:
A rupee today represents a greater real purchasing power than a rupee in future.
3.Consumption:
Individuals generally prefer current consumption to future consumption.
4.Investment opportunities
An investor can profitably use the received money today to get higher return tomorrow or after a certain period of
time.
 I M P O RTA N C E

1. In Investment Decisions - Small businesses often have limited resources to invest in business operations,
activities and expansion. One of the factors we have to look at is how to invest, is the time value of money.
2. In Capital Budgeting Decisions - When a business chooses to invest money in a project - such as an
expansion, a strategic acquisition or just the purchase of a new piece of equipment -- it may be years
before that project begins producing a positive cash flow. The business needs to know whether those future
cash flows are worth the upfront investment.
 TIME VALUE OF MONEY
• Present value (PV) - This is your current starting amount.  It is the money you have in your hand at the
present time, your initial investment for your future. 
• Future value (FV) - This is your ending amount at a point in time in the future. It should be worth more than
the present value, provided it is earning interest and growing over time.
• The number of periods (N) - This is the timeline for your investment (or debts). It is usually measured in
years, but it could be any scale of time such as quarterly, monthly, or even daily.
• Interest rate (I) - This is the growth rate of your money over the lifetime of the investment. It is stated in a
percentage value, such as 8% or .08.
• Payment amount (PMT) - These are a series of equal, evenly-spaced cash flows.
• Ques. At the end of 3rd year what amount we will get or what will
• be the future value of Rs.10,000 at rate of 4.5% uniformly.
• Solution;
• As we know PV=𝐹𝑉/(1+𝑖)𝑛 𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛
• where, PV= Rs.10,000 , i= 4.5% and n= 3 years
• Therefore,
• FV= 10,000 (1 + 0.045)3
• = 10,000 (1.045)3 = 10,000 (1.14116612)
• = Rs.11411.66 ( at the end of the 3rd year)
 COMPARISON OF ALTERNATIVES

• Considering the comparision is between the Future Value and the present Value
of the Investment.
• Priority depends upon the objective with which the investment has been done.
• So one cannot Generalise that these is better or that is better it totally depends
on the priorities which basically varies from investor to investor.