LONG QUESTION ANSWER - Financial Statements Notes - Class 11

Class 11: LONG QUESTION ANSWER - Financial Statements Notes - Class 11

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 Page 1


CHAP 9 
 
Q.1. What arc financial statements ? What information do they provide ? 
Ans.Accounting involves recording. classifying and summarising various business 
transactions. The end-product of all business transactions arc financial statements. financial 
statements refer to the statements of financial data according to logical and consistent 
accounting principles. Financial statements provide useful information to various persons. 
Financial statements may be defined as the reports prepared to present a periodical review of 
performance and the financial position of a business enterprise. Financial statements provide 
following information 
(i) Profit or loss earned by the enterprise. 
(ii) Financial position of the enterprise. 
Q.2. What are closing entries ? Give four examples of closing entries. 
Ans.Closing entries are the entries which are made at the end of each accounting period for 
the purpose of transferring the various items to Profit and Loss Account. Closing entries 
close the nominal accounts. Following are the examples of closing entries : 
(i) For transferring opening stock. purchases and direct expenses to debit side of Trading 
Account. 
Trading A/c                                                      Dr. 
        To Opening Stock A/c 
        To Purchases A/c 
        To Direct Expenses A/c 
(ii) For Transferring Sales and Closing Stock to credit side of Trading Account: 
Sales A/c                          Dr. 
Closing Stock A/c             Dr. 
        To Trading A/c 
(iii) For Transferring Salaries. Priming and Stationery etc to debit side of Profit and Loss Account 
        Profit and Loss A/c                  Dr 
        To Salaries A/c 
        To Printing and Stationer) A/c 
Page 2


CHAP 9 
 
Q.1. What arc financial statements ? What information do they provide ? 
Ans.Accounting involves recording. classifying and summarising various business 
transactions. The end-product of all business transactions arc financial statements. financial 
statements refer to the statements of financial data according to logical and consistent 
accounting principles. Financial statements provide useful information to various persons. 
Financial statements may be defined as the reports prepared to present a periodical review of 
performance and the financial position of a business enterprise. Financial statements provide 
following information 
(i) Profit or loss earned by the enterprise. 
(ii) Financial position of the enterprise. 
Q.2. What are closing entries ? Give four examples of closing entries. 
Ans.Closing entries are the entries which are made at the end of each accounting period for 
the purpose of transferring the various items to Profit and Loss Account. Closing entries 
close the nominal accounts. Following are the examples of closing entries : 
(i) For transferring opening stock. purchases and direct expenses to debit side of Trading 
Account. 
Trading A/c                                                      Dr. 
        To Opening Stock A/c 
        To Purchases A/c 
        To Direct Expenses A/c 
(ii) For Transferring Sales and Closing Stock to credit side of Trading Account: 
Sales A/c                          Dr. 
Closing Stock A/c             Dr. 
        To Trading A/c 
(iii) For Transferring Salaries. Priming and Stationery etc to debit side of Profit and Loss Account 
        Profit and Loss A/c                  Dr 
        To Salaries A/c 
        To Printing and Stationer) A/c 
(iv)For Transferring Interest on Investments to credit side of Profit and Loss Account: 
        Interest on Investments A/c                     Dr. 
                        To Profit and Loss A/c 
Q.3. Discuss the need of preparing a Balance Sheet. 
Ans.The need of preparing a Balance Sheet arises to measure the correct financial position of a business 
enterprise on a certain fixed date. Balance Sheet depicts the sources of investment i.e. owners' funds and 
outsiders' liabilities and the applications of investment Balance Sheet is an important statement for 
evaluating solvency. liquidity. profitability and efficiency of the business. 
Q.4. What is meant by Grouping and Marshalling of assets and liabilities? Explain. the ways in which 
a Balance Sheet may be Marshalled. 
Ans.Balance Sheet is a statement and not an account. Balance Sheet is prepared from real and personal 
accounts. The real and personal accounts in the Balance Sheet should be arranged in such a manner that 
anyone reading them can immediately gel a true and fair view of the financial position of business. This is 
intended to be achieved by Grouping and Marshalling. Grouping means putting together items of a similar 
nature under a common heading. For example. under the heading of Sundry Creditors. the balances of the 
ledger accounts of all the creditors will be shown. Marshalling refers to the order in which the various 
liabilities and assets are arranged in the Balance Sheet There are two ways of Marshalling various items in 
the 
Balance Sheet : 
(a) In order of liquidity. and 
(b) In order of permanence. 
In order of liquidity -The term 'Liquidity)" means the readiness with which the asset can be converted into 
cash The shorter the time taken in converting the asset into cash. the greater will be the liquidity. Thus. cash 
is the most liquid asset. If items arc to be arranged in order of liquidity. the most liquid asset i.e. cash in 
hand is shown first and the least liquid asset I.e. goodwill is shown in the last. The liabilities are arranged in 
the order of urgency of payment It means that the most urgent payment to be made is shown first and the 
least urgent payment to be made is shown in the last. Accordingly. short-term creditors are shown first and 
capital is shown in the last. Following is the proforma of Balance Sheet in order of liquidity: 
                                        Balance Sheet as 
                                                        on...... 
Liabilities Rs. Assets Rs. 
Page 3


CHAP 9 
 
Q.1. What arc financial statements ? What information do they provide ? 
Ans.Accounting involves recording. classifying and summarising various business 
transactions. The end-product of all business transactions arc financial statements. financial 
statements refer to the statements of financial data according to logical and consistent 
accounting principles. Financial statements provide useful information to various persons. 
Financial statements may be defined as the reports prepared to present a periodical review of 
performance and the financial position of a business enterprise. Financial statements provide 
following information 
(i) Profit or loss earned by the enterprise. 
(ii) Financial position of the enterprise. 
Q.2. What are closing entries ? Give four examples of closing entries. 
Ans.Closing entries are the entries which are made at the end of each accounting period for 
the purpose of transferring the various items to Profit and Loss Account. Closing entries 
close the nominal accounts. Following are the examples of closing entries : 
(i) For transferring opening stock. purchases and direct expenses to debit side of Trading 
Account. 
Trading A/c                                                      Dr. 
        To Opening Stock A/c 
        To Purchases A/c 
        To Direct Expenses A/c 
(ii) For Transferring Sales and Closing Stock to credit side of Trading Account: 
Sales A/c                          Dr. 
Closing Stock A/c             Dr. 
        To Trading A/c 
(iii) For Transferring Salaries. Priming and Stationery etc to debit side of Profit and Loss Account 
        Profit and Loss A/c                  Dr 
        To Salaries A/c 
        To Printing and Stationer) A/c 
(iv)For Transferring Interest on Investments to credit side of Profit and Loss Account: 
        Interest on Investments A/c                     Dr. 
                        To Profit and Loss A/c 
Q.3. Discuss the need of preparing a Balance Sheet. 
Ans.The need of preparing a Balance Sheet arises to measure the correct financial position of a business 
enterprise on a certain fixed date. Balance Sheet depicts the sources of investment i.e. owners' funds and 
outsiders' liabilities and the applications of investment Balance Sheet is an important statement for 
evaluating solvency. liquidity. profitability and efficiency of the business. 
Q.4. What is meant by Grouping and Marshalling of assets and liabilities? Explain. the ways in which 
a Balance Sheet may be Marshalled. 
Ans.Balance Sheet is a statement and not an account. Balance Sheet is prepared from real and personal 
accounts. The real and personal accounts in the Balance Sheet should be arranged in such a manner that 
anyone reading them can immediately gel a true and fair view of the financial position of business. This is 
intended to be achieved by Grouping and Marshalling. Grouping means putting together items of a similar 
nature under a common heading. For example. under the heading of Sundry Creditors. the balances of the 
ledger accounts of all the creditors will be shown. Marshalling refers to the order in which the various 
liabilities and assets are arranged in the Balance Sheet There are two ways of Marshalling various items in 
the 
Balance Sheet : 
(a) In order of liquidity. and 
(b) In order of permanence. 
In order of liquidity -The term 'Liquidity)" means the readiness with which the asset can be converted into 
cash The shorter the time taken in converting the asset into cash. the greater will be the liquidity. Thus. cash 
is the most liquid asset. If items arc to be arranged in order of liquidity. the most liquid asset i.e. cash in 
hand is shown first and the least liquid asset I.e. goodwill is shown in the last. The liabilities are arranged in 
the order of urgency of payment It means that the most urgent payment to be made is shown first and the 
least urgent payment to be made is shown in the last. Accordingly. short-term creditors are shown first and 
capital is shown in the last. Following is the proforma of Balance Sheet in order of liquidity: 
                                        Balance Sheet as 
                                                        on...... 
Liabilities Rs. Assets Rs. 
Bank Overdraft 
Bills Payable 
Sundry Creditors 
Loan on Mortgage 
General Reserve Capital 
  
 Cashin hand 
 Cash at Bank 
 Short-term Investments 
 Bills Receivable 
 Sundry Debtors 
 Stock 
 Furniture 
 Plant and Machinery 
 Land and Building       
 Goodwill 
  
    
In order of permanence -This order of Marshalling assets and liabilities is exactly reverse of liquidity 
order Under this order. the most permanent ass ct and liability will appear first and the most non-permanent 
 
i.e. most liquid asset and liability will appear in the last. Under the provisions of Companies 
Act. a company is required to prepare its Balance Sheer in order of permanence. Following is 
the proforma of Balance Sheet in order of permanence : 
                                        Balance Sheet 
                                        as on............. 
Liabilities Rs. Assets Rs. 
Capital 
General Reserve 
Loan on Mortgage 
Sundry Creditors 
Bills Payable 
Bank Overdraft 
  
Goodwill 
Land and Building 
Plant and Machinery 
Furniture 
Stock 
Sundry Debtors 
Bills Receivable 
Short-term Investments 
  
  
 
Page 4


CHAP 9 
 
Q.1. What arc financial statements ? What information do they provide ? 
Ans.Accounting involves recording. classifying and summarising various business 
transactions. The end-product of all business transactions arc financial statements. financial 
statements refer to the statements of financial data according to logical and consistent 
accounting principles. Financial statements provide useful information to various persons. 
Financial statements may be defined as the reports prepared to present a periodical review of 
performance and the financial position of a business enterprise. Financial statements provide 
following information 
(i) Profit or loss earned by the enterprise. 
(ii) Financial position of the enterprise. 
Q.2. What are closing entries ? Give four examples of closing entries. 
Ans.Closing entries are the entries which are made at the end of each accounting period for 
the purpose of transferring the various items to Profit and Loss Account. Closing entries 
close the nominal accounts. Following are the examples of closing entries : 
(i) For transferring opening stock. purchases and direct expenses to debit side of Trading 
Account. 
Trading A/c                                                      Dr. 
        To Opening Stock A/c 
        To Purchases A/c 
        To Direct Expenses A/c 
(ii) For Transferring Sales and Closing Stock to credit side of Trading Account: 
Sales A/c                          Dr. 
Closing Stock A/c             Dr. 
        To Trading A/c 
(iii) For Transferring Salaries. Priming and Stationery etc to debit side of Profit and Loss Account 
        Profit and Loss A/c                  Dr 
        To Salaries A/c 
        To Printing and Stationer) A/c 
(iv)For Transferring Interest on Investments to credit side of Profit and Loss Account: 
        Interest on Investments A/c                     Dr. 
                        To Profit and Loss A/c 
Q.3. Discuss the need of preparing a Balance Sheet. 
Ans.The need of preparing a Balance Sheet arises to measure the correct financial position of a business 
enterprise on a certain fixed date. Balance Sheet depicts the sources of investment i.e. owners' funds and 
outsiders' liabilities and the applications of investment Balance Sheet is an important statement for 
evaluating solvency. liquidity. profitability and efficiency of the business. 
Q.4. What is meant by Grouping and Marshalling of assets and liabilities? Explain. the ways in which 
a Balance Sheet may be Marshalled. 
Ans.Balance Sheet is a statement and not an account. Balance Sheet is prepared from real and personal 
accounts. The real and personal accounts in the Balance Sheet should be arranged in such a manner that 
anyone reading them can immediately gel a true and fair view of the financial position of business. This is 
intended to be achieved by Grouping and Marshalling. Grouping means putting together items of a similar 
nature under a common heading. For example. under the heading of Sundry Creditors. the balances of the 
ledger accounts of all the creditors will be shown. Marshalling refers to the order in which the various 
liabilities and assets are arranged in the Balance Sheet There are two ways of Marshalling various items in 
the 
Balance Sheet : 
(a) In order of liquidity. and 
(b) In order of permanence. 
In order of liquidity -The term 'Liquidity)" means the readiness with which the asset can be converted into 
cash The shorter the time taken in converting the asset into cash. the greater will be the liquidity. Thus. cash 
is the most liquid asset. If items arc to be arranged in order of liquidity. the most liquid asset i.e. cash in 
hand is shown first and the least liquid asset I.e. goodwill is shown in the last. The liabilities are arranged in 
the order of urgency of payment It means that the most urgent payment to be made is shown first and the 
least urgent payment to be made is shown in the last. Accordingly. short-term creditors are shown first and 
capital is shown in the last. Following is the proforma of Balance Sheet in order of liquidity: 
                                        Balance Sheet as 
                                                        on...... 
Liabilities Rs. Assets Rs. 
Bank Overdraft 
Bills Payable 
Sundry Creditors 
Loan on Mortgage 
General Reserve Capital 
  
 Cashin hand 
 Cash at Bank 
 Short-term Investments 
 Bills Receivable 
 Sundry Debtors 
 Stock 
 Furniture 
 Plant and Machinery 
 Land and Building       
 Goodwill 
  
    
In order of permanence -This order of Marshalling assets and liabilities is exactly reverse of liquidity 
order Under this order. the most permanent ass ct and liability will appear first and the most non-permanent 
 
i.e. most liquid asset and liability will appear in the last. Under the provisions of Companies 
Act. a company is required to prepare its Balance Sheer in order of permanence. Following is 
the proforma of Balance Sheet in order of permanence : 
                                        Balance Sheet 
                                        as on............. 
Liabilities Rs. Assets Rs. 
Capital 
General Reserve 
Loan on Mortgage 
Sundry Creditors 
Bills Payable 
Bank Overdraft 
  
Goodwill 
Land and Building 
Plant and Machinery 
Furniture 
Stock 
Sundry Debtors 
Bills Receivable 
Short-term Investments 
  
  
 
Cash at Bank Cash in Hand 
 
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