Financial Statements H.S. 1ST YEAR ACCOUNTANCY NOTES AHSEC ASSAM Higher Secondary UNIT -7

 

Unit – 7

Financial Statements

 

Q1. What is financial statement? What are its objectives?

Ans. Financial statements are the summary statements which are prepared to show periodic performance of a business organization and its financial position at the end of each period. Usually profit & loss A/c and Balance sheet are collectively known as Final Accounts as they are prepared for such purposes.

Following are the objectives of financial statements:

a. To find out the profit or loss of a business during the accounting period.

b. To know the financial position of a business i.e., the position of assets, liabilities and capital at the end of the accounting period.


Q2. What is trading account? What are the needs for trading account?

Ans. Trading account is the first part of financial statements which shows the results of buying and selling of goods and services during an accounting period.

Following are the needs for trading account:

a. To ascertain gross profit or gross loss: The main purpose of preparing trading account is to ascertain the gross profit and gross loss of the business arising from buying and selling of goods.

b. To know the direct expenses: All the direct expenses are recorded in the debit of trading account.

c. To make comparison of stock: The comparison of opening and closing stock helps the management to know the increase or decrease in stock.

d. To fix up selling price: The item of trading account facilitates the ascertainment of cost of goods sold, which subsequently helps in fixing up selling price.


Q3. What is profit & loss account? What are the needs for profit & loss account?

Ans. A profit and loss account is an account into which all gains and losses are collected. If the gains exceed the losses, the excess is the net profit; if the losses are greater than the gains the difference is the net loss.

Following are the needs for profit & loss account:

a. Knowledge of net profit or net loss: The profit and loss account is prepared to ascertain the amount of net profit or net loss for a particular period of time.

b. Comparison of profits: The net profit for the current year as disclosed by profit and loss account is compared with the net profit of the last year.

c. Control over expenses: The profit and loss account helps in comparing the indirect expenses of the current year with the previous year expenses.

d. Future planning: On the basis of information disclosed by the profit and loss account, the future course of action may be decided by the management.

Q4. What are the difference between Trading account and Profit & Loss account?

Ans. Following are the difference between Trading account and Profit & Loss account:

Trading Account

Profit & Loss Account

a. Trading account is prepared to find out the trend of the business for a period.

a. The profit & loss account is prepared to know the ultimate result of the business for a period.

b. Trading account is prepared before preparing the profit and loss account.

b. Profit and loss account is prepared after preparing the trading account.

c. Trading account shows gross profit and gross loss.

c. Profit and loss account shows net profit or net loss.

d. The balancing of trading account is transferred to profit and loss account.

d. The balancing of profit & loss account is transferred to proprietor’s capital account.

 

Q 5. What are the difference between Gross Profit and Net Profit?

Ans.  Following are the difference between Gross Profit and Net Profit:

Gross Profit

Net Profit

a. Gross profit is the excess of sale proceeds over the cost of goods sold.

a. Net profit is the excess of gross profit and income over all expenses and losses.

b. Gross profit is revealed by trading account.

b. Net profit is disclosed by profit and loss account.

c. Gross profit is transferred to profit and loss account.

c. Net profit is transferred to the proprietors capital account.

 

Q6. What is Balance sheet?

Ans. Balance Sheet is the final phase in accounting cycle. It is a mirror which reflects the true position of the assets and liabilities of the business on a particular day.

 

Q7. What are the difference between Trial Balance and Balance Sheet?

Ans.  Following are the difference between Trial Balance and Balance Sheet:

Trial Balance

Balance Sheet

a. The purpose of preparing the trail balance is to check the arithmetical accuracy of accounts book.

a. The main object of preparing the balance sheet is to know the financial position of business.

b. Trial balance may be prepared at regular intervals e.g. monthly, quarterly.

b. Balance sheet is generally prepared at the end of accounting period.

c. Closing stock is generally not shown in the trial balance.

c. Closing stock is always shown on the asset side of balance sheet.

d. Trial balance has two sides i.e., debit and credit.

d. Balance sheet has two sides i.e., assets and liabilities.

e. Trial balance does not help in the analysis of financial statements.

e. Balance sheet is of great use to analyze the financial position of business.


Q8. What is Marshalling of Balance Sheet?
 

Ans. Marshalling denotes the sequence of assets and liabilities to be shown in the balance sheet. There are no statutory guidelines for the sequence or order of assets and liabilities for the preparation of balance sheet of sole proprietor and partnership firm. In case of balance sheet of joint stock companies there is a specific proforma prescribed by the companies Act.

 

Q9.What are the differences between capital expenditure and revenue expenditure?

Ans.  Following are the difference between capital expenditure and revenue expenditure:

Capital expenditure

Revenue expenditure

a. Expenses incurred in acquiring fixed assets or improving fixed assets are termed as capital expenditure.

a. Expenses incurred for meeting the day-to-day business expenses are known as revenue expenditure.

b. It is non-recurring expenditure.

b. It is treated as recurring expenditure.

c. These are incurred in purchasing of fixed assets.

c. These are incurred for conducting the business.

d. It helps to increase the earning capacity of the business.

d. These are incurred for earning profit.

e. The benefit of capital expenditure is received over a number of years.

e. The benefit of revenue expenditure is restricted only to the accounting period in which it is incurred.

 

Q10. Write short notes on Current Assets and Current Liabilities.

Ans.  a. Current Assets: Current assets are those assets which are held in the form of cash; for their conversion into cash, as early as possible and for their consumption in the production of gods. For example cash in hand, cash at bank, stock of finished goods, debtors, bills receivable, stock of raw materials etc.

b. Current Liabilities: Those liabilities which are required to be paid out of current assets within one accounting period are called current liabilities. This includes bills payable, sundry creditors, short term loans, bank overdraft, outstanding expenses etc.

 

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