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Key Notes: Financial Statements - I | Accountancy Class 11 - Commerce PDF Download

Learning Objectives

  • Understand the nature of financial statements.
  • Differentiate between capital and revenue expenditure and receipts.
  • Explain the concept of trading and profit and loss account and how to prepare it.
  • Define gross profit, net profit, and operating profit.
  • Describe the concept of the balance sheet and its preparation.
  • Understand grouping and marshalling of assets and liabilities.
  • Prepare a profit and loss account and balance sheet for a sole proprietor firm.

Financial Statements:

  • Financial statements communicate information about a business's profitability and financial position.
  • Include the income statement (Trading and Profit and Loss Account) and the balance sheet (Statement of Financial Position).
  • Also include schedules and notes to provide details on items in both statements.

Capital Expenditure:

  • Non-recurring expenses benefiting the business for over a year.
  • Includes acquiring or improving fixed assets, acquiring legal rights, or initial expenses to make fixed assets operational.
  • Recorded on the assets side of the balance sheet.

Revenue Expenditure:

  • Routine expenses for smooth business operations.
  • Includes direct expenses, raw material purchases, rent, salary, repairs, etc.
  • Shown on the debit side of the income statement.

Deferred Revenue Expenditure:

  • Expenses of a revenue nature with heavy spending, benefits spread over years.
  • Examples include heavy advertising expenses during product launch.
  • Accounting treatment: Spread over the years of benefit.

Capital Receipt:

  • Irregular receipts not affecting profit/loss but increasing liabilities or reducing fixed assets.
  • Shown on the balance sheet.

Revenue Receipt:

  • Regular receipts from normal business activities (e.g., sales, services).
  • Increases profit, shown on the credit side of the income statement.

Types of Expenses:

  • Direct Expenses: Related to goods purchase and production.
  • Indirect Expenses: Not directly related to production (e.g., administrative, selling).

Calculation of Profits:

  • Gross Profit = Net Sales - Cost of Goods Sold
  • Operating Profit = Gross Profit - Operating Expenses
  • Net Profit = Operating Profit + Non-operating Income - Non-operating Expenses

Grouping and Marshalling of Assets and Liabilities:

  • Grouping: Organizing items of similar nature under common headings.
  • Marshalling: Order in which assets and liabilities appear (liquidity or permanence).

Order of Liquidity:

  • Assets in order of liquidity (most liquid first).
  • Liabilities arranged by timing (immediate to long-term).

Order of Permanence:

  • Assets in order of permanence (least liquid first).
  • Liabilities arranged by urgency (short-term to long-term).

Adjustment in Preparation of Financial Statements:

  • Closing Stock: Represents unsold goods, shown on the balance sheet.
  • Outstanding Expenses: Unpaid expenses at year-end, deducted from related expenses and shown on the balance sheet.
  • Prepaid Expenses: Expenses not fully received, shown on the balance sheet.
  • Accrued Income: Income earned but not received, shown on the balance sheet.
  • Income Received in Advance: Income received but belongs to the next period, shown on the balance sheet.
  • Depreciation: Decline in asset value, treated as an expense, shown on the income statement.
The document Key Notes: Financial Statements - I | Accountancy Class 11 - Commerce is a part of the Commerce Course Accountancy Class 11.
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