Financial Accounting an Introduction

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Name: Sagar Singh Study: Bachelor of Business Administration (BBA-1sem) Subject: Financial Accounting an Introduction Topic: Financial Statements Unit: 10:

Name: Sagar Singh Study: Bachelor of Business Administration (BBA-1sem) Subject: Financial Accounting an Introduction Topic: Financial Statements Unit: 10

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10.1 Meaning of Financial Statements After ascertaining the arithmetical accuracy of ledger accounts a business concern has to proceeds to prepare financial statements of final accounts. To determine the profit or loss, income statement or trading and profit and loss a/c is prepared. Balance sheet or statement of financial condition of the organisation on a particular date. These two statements are collectively called final accounts. Final accounts are required to be prepared by every business concern at the end of accounting year, because they provide valuable

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accounting information to all interested key parties such as management, shareholders, creditors, government, employees, customer etc. They provide a concise picture of profitability and financial position of the business. They are the end products of accounting process. They summarize all the accounting information recorded in the books of original entry and ledger. 10.2 Objectives of Financial Statements International accounting Standards Committee (IASC) stated that the objective of financial statements is to provide information about the

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enterprise “that is useful to a wide range of users in making economic decisions. Various stakeholders would like to assess the financial performance of the enterprise, its ability to generate future cash flows. It is almost impossible to make sound decision on above matter if one has no access to the financial statements. Financial statements act as a summary of all transactions, which have been taking place in business. The financial statements comprise of the income statements account,

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the balance sheet and also its cash flow statement. 10.3 Principal Characteristics of Financial Statements There is always a grave misconception that accounting involves financial figures only. Financial figures are offers little information and may sometimes be misleading to the users of financial statements. Qualitative information simplifies and expands on the financial figures to ensure easy understanding and comparability of result. The main characteristics are: 1. Relevance: This simply means the information is able to directly influence the decision making

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process of the user. To be relevant, financial information should contain the past as well as present records and be able to provide a yardstick for the future. Relevance is also measured in relation to materiality. If an item or event is material, it is probably relevant to the user of financial statements. In other words, an item is material if the user would have done sometimes differently if he or she had not known about the item. In assessing materiality of financial information it should not only be based on the financial value but also depends on the nature of the transaction.

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2. Understandability: In addition to relevance, the users of financial statements. Understandability is about communicating an intended meaning. This depends on both the accountant and the decision maker. Accountants should produce financial information and present it in a form, which can be easily understood and interpreted by their intended users. Example, information which is produced for the loan application at the bank need to be more elaborate on the financial position of the enterprise which information for the Malawi revenue authority need to emphasizes on profitability.

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3. Reliability: According to IASC’s Conceptual framework, to be reliable information must be neutral, that is free from bias. Financial statements are not neutral, by the selection or presentation of information, they are influence the making of a decision or judgment in order to a pre determined result or income. In order to be relied upon, the financial information requires the following attributes. Faithful presentation of information. Neutrality. Substance over form i.e. accounting should be based on financial reality and not merely on legal

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form. Prudence. Completeness Comparability: Another important character of accounting information is comparability. Financial statements of the organisation must be capable of be linked with other non-financial information within the enterprise. User should also be able to compare financial statements of an enterprise through time in order to assess the trend in performance and financial position. In assessing the compatibility of financial information should be presented together with

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the corresponding information of the preceding periods for easy comparison. 10.4 Constraints on Relevant and Reliability Statements Timeliness Delay in releasing information may result in information lose its relevance. Management may need to balance the relative merits of timely reporting and the provision of reliable information. In achieving a balance between relevance and reliability, the overriding factor is how best to satisfy the economic decision making of the users.

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Cost-Benefits Analysis The cost of producing financial information should out weigh the cost of obtaining the information. In trying to minimize cost the character of relevance and reliability may be compromised. Of course, minimum levels of relevance and reliability must be reached for accounting information to be useful. Balance between Qualitative Characteristics Accountants should use their professional judgment in balancing the qualities of relevance and reliability. The accounts should apply all acceptable accounting standards and other

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relevant general acceptable accounting principle in order to show that the information shows a true and fair view. 10.5 Trading Account It is prepared to know the trading results of the business. It is the account, which shows merely the result of buying and selling of goods i.e. gross profit or gross loss on trading without taking into account administration, selling and financial expenses incurred in running the business. It discloses the gross profit of the business during a particular period. Gross profit is the difference between the sales and cost of goods sold. Cost of

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goods sold is calculated by taking into account opening stock, purchases, direct expenses in purchasing or manufacturing the goods and closing stock. manufacturing expenses include coal, water and gas, motive power, octroi, import duty, customs duty, consumable stores, salary of foremen/works manager, royalty on manufactured goods, carriages, cartage, freight, factory expenses, insurance, lighting, depreciation on factory building, plant and machinery, etc.

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s Form of Trading Account: Trading account for the year ended Particulars Amount Amount Particulars Amount Amount To opening stock xxx By Sales xxx To Purchases a/c Xxx Less: Sales returns xx xxx Less: Returns Xx xxx By Closing stock xxx To Direct expenses xx By Gross loss c/d xx To carriage xx To Wages xx To Fuel and power xx To Manufacturing expenses xx To Gross profit c/d xx xxx xxx

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10.6 Profit and Loss account The profit and loss account is an account, which shows the net profit or net loss of a business for a particular trading period. This account is prepared to calculate the net profit or net loss of the business. It takes into account all expenses, selling and distribution, management or administrative, financial expenses, extra ordinary losses and expenses to maintain assets. This account is prepared from nominal accounts and its balance is transferred to capital account.

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Sagar Singh Specimen of Profit and Loss Account: Profit and loss for the year ended Particular Amount Particular Amount To gross loss b/d xx By gross profit b/d xx To management or administration expenses xx By interest received xx To Salaries xx By discount received xx To Rent, rates and taxes xx By commission received xx To Heating and lighting xx By rent from tenants xx To Printing & stationery xx By interest on investments xx To Postage and telegram xx By interest on debentures xx To Telephone charges xx By dividend received xx To Legal charges xx By miscellaneous income xx To Audit fees xx By profit on sale of assets xx

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Sagar Singh To Insurance xx By income on any other source xx To General expenses xx By net loss transferred to capital account xx To selling & distribution expenses To Advertisement, expenses xx To Traveling expenses xx To Salesman salaries xx To Bad debts xx To Reserve for bad debts xx To Stable expenses xx To Track or general or sundry expenses xx To agents commission To godown rent To export expenses

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To selling expenses xx To carriage outwards xx To bank charges xx To upkeeping loans xx To depreciation on assets xx To Depreciation on furniture xx To Depreciation on building xx To Depreciation on vehicles xx To Repairs and maintenance xx To financial expenses xx To Discount allowed xx To Interest on capital xx To Interest on loans xx To Discount on bills xx To losses or extra ordinary expenses xx To Loss by fire xx To Cash defalcation xx To net profit transferred to capital account xx xxxx xxxx

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10.7 Balance Sheet The trading and profit and loss account shows only the net profit or net loss of a business for a certain trading period. But the trader likes to know the financial position of the business at the end of the trading period. For this purpose he prepares a statement of his assets and liabilities as on the closing date of the trading period . This statement is known as balance sheet. A balance sheet is a statement prepared to measure the financial position of the business on a certain fixed date. The financial position indicated by its assets on a given date and its liabilities on that date. Excess of assets over liabilities represents the capital and

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financial soundness of the organisation. It is also described as a statement showing the sources and application of capital. The balance sheet is one of the most important financial statements of a company. It is reported to investors at least once per year. It may also be presented quarterly, semiannually or monthly. The balance sheet provides information on what the company owns (its assets), what it owes (its liabilities), and the value of the business to its stockholders (the shareholders’ equity). The name, balance sheet, is derived from the fact that these accounts must always be in balance. Assets must always equal the sum of liabilities and shareholders’ equity. In short a balance sheet is a sheet containing the balances of

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real and personal accounts of a business. 10.7.1 Assets: Assets refer to properties owned by a concern and debts due to a concern from other parties. Assets are property and possession of a business. Assets can be buildings and machinery used to manufacture products. They can be patents or copyrights that provide financial advantages for their holder. They are classified on the basis of their nature. The various types of assets are— Fixed Assets: Fixed assets are those tangible assets with a useful life greater than one year. Generally, fixed

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assets refer to items such as equipment, buildings, production plants and property. On the balance sheet, these are valued at their cost. Depreciation is subtracted from all except land. Fixed assets are very important to a company because they represent long-term illiquid investments that a company expects will help it generate profits. Current Assets: Current assets are assets that are usually converted to cash within one year. Bondholders and other creditors closely monitor a firm’s current assets since interest payments are generally made from current assets. They include

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include several forms of current assets. Intangible Assets: These are non-physical assets such as copyrights, franchises and patents. To estimate their value is very difficult because they are intangible. Often there is no ready market for them. Nevertheless, for some companies, an intangible assets can be the most valuable assets it possesses. Fictitious Assets: These are mere debit balances i.e. expenses and losses, carried forward one accounting year to another. These assets are fictitious, as they are not represented by any tangible property.

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Wasting Assets: Wasting assets are those fixed assets, which are exhausted or lost through use. Examples of wasting assets are mines quarries. Mines become useless when they are fully exploited. Similarly quarries become valueless, when they are fully exploited. Liquid Assets: Liquid assets are those current assets, which are either in the form of cash or which can be converted into cash quickly without much loss. Examples of liquid assets are cash in hand, cash at bank, bills receivable, sundry debtors etc.

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10.7.2 Liabilities: Liabilities are obligations a company owes to outside parties. They represent rights of others to money or services of the company. Examples include bank loans, debts to employees. On the balance sheet, liabilities are generally broken down into current liabilities and long-term liabilities. Current Liabilities: Current liabilities are those obligations that are usually paid within the year, such as accounts payable, interest on long-term debts, taxes payable, and dividends payable. Because current

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liabilities are usually paid with current assets, as an investor it is important to examine the degree to which current assets exceed current liabilities. The most pervasive item in the current liability section of the balance sheet is accounts payable. Accounts payable are debts owed to suppliers for the purchase of goods and services on an open account. Almost all firms buy some or all of their goods on account. Therefore, you will often see accounts payable on most balance sheets.

NAME: Sagar Singh STUDY: Bachelor of Business Administration (BBA – Sem1) SUBJECT: Financial Accounting an Introduction TOPIC: Bank Reconciliation Statement UNIT: 7:

NAME: Sagar Singh STUDY: Bachelor of Business Administration (BBA – Sem1) SUBJECT: Financial Accounting an Introduction TOPIC: Bank Reconciliation Statement UNIT: 7

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7.2 Meaning of Bank Reconciliation Statement A bank reconciliation statement is a statement prepared by a customer to explain the causes responsible disagreement between the bank balance as shown by the cash book and the bank balance as shown by the pass book as on a particular date. In order wards a from

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