Three Major Financial Statements

Financial statements act like a report card for a business. The three major financial statements are prepared as a summary of figures and facts showing the financial condition of a business. They are not only used to show how a business uses its funds committed by the shareholders and the lenders, but also to see where the business stands in terms of its financial position.

 

  • Profit & Loss Account or Income Statement
  • Balance Sheet or Statement of Financial Position 
  • Cash Flow Statement or Statement Accounting for Variations in Cash

 

Profit & Loss Account or Income Statement

After the preparation of a trading account, a profit & loss account is prepared to determine the net profit earned or net loss incurred due to the operations of a business. It is an important final account of a business which shows the summarized view of revenues and expenses for a particular accounting period.

In the horizontal form of a P&L account, Gross profit or Gross loss, whatever is determined from the trading account, is transferred accordingly. Debit side will have all expenses and the credit side – all receipts, both arising out of day-to-day activities. The difference of two sides of this account is either net profit or net loss, which is then transferred to the capital account.

 

(Sample Format of a P&L Account)

Dr.   Cr.
 Particulars  Amt  Particulars  Amt
 To Trading A/C (Gross Loss)  xxx  By Trading A/C (Gross Profit)  xxx
 To Rent  xxx   By Commission Earned  xxx
 To Depreciation   xxx   By Bad Debts Recovered   xxx 
 To Bad Debts   xxx   By Interest Earned   xxx 
 To Printing & Stationery   xxx   By Dividends on Share  xxx 
 To Salaries  xxx   By Example Income 1^  xxx 
 To Legal Cost   xxx 
 To Example Expense 1^ xxx   By Capital A/C (Net Loss)*   
   
 To Capital A/C (Net Profit)* xxx     

*Either of the two will appear. ^Any head can be used instead of the example.


 

Balance Sheet or a Statement of Financial Position 

After the preparation of trading and P&L account, a balance sheet is to be prepared. It is a statement that shows a detailed listing of assets, liabilities and capital demonstrating the financial condition of a company on a given date. It is not only required to be prepared according to the companies act, but also needed to ascertain the financial position of a business.

The liabilities and capital are shown on the left-hand side, whereas the assets are shown on the right-hand side. According to the accounting equation Assets = Capital + Liabilities, the total of Left hand side should always be equal to Right hand side in a balance sheet.

 

(Sample Format of a  Balance Sheet)

 Liabilities Amt  Assets  Amt
 Capital  xxx  Land & Building  xxx
 Reserves & Surplus  xxx  Plant & Machinery  xxx
 Outstanding Expenses  xxx  Furniture  xxx
 Loans  xxx  Stock  xxx
 Trade Creditors  xxx  Sundry Debtors  xxx
 Bills Payable  xxx  B/R  xxx
     Misc. Investments  xxx
     Cash  xxx
   
 Total  XXX  Total   XXX


 

Cash Flow Statement or Statement Accounting for Variations in Cash

A Cash Flow Statement is a financial statement which is mandatory to be prepared according to the law along with the other two financial statements. A cash flow statement shows the movement of cash and cash equivalents, i.e. its in depth inflow and outflow for a given period of time. The statement shows the net cash flow from operating, investment and financing activities.

A cash flow statement depicts the sources and uses of a company’s cash and equivalents, which is a very important information for stakeholders.

 

(Sample Format of a  Cash Flow Statement)

 Cash Flow Statement Indirect Method  Amt
 Cash flows from operating activities  
 Net profit before taxation  
 Adjustments for,  
 Depreciation  
 Investment income  
 Interest expense  
 Foreign Exchange Loss  
 Operating profit before working capital changes  
 Working capital changes:  
 Add Decrease/Less Increase in Sundry Debtors  
 Add Decrease/Less Increase in Inventories  
 Less Decrease/Add Increase in Sundry Creditors  
   
 Cash flow from operations  
 Interest paid  
 Income taxes paid  
 Cash flow from extraordinary items  
 1. Net cash from operating activities  
   
 Cash flows from investing activities  
 Purchase of fixed asset  
 Proceeds from sale of equipment  
 Investment income  
 Dividends Received  
 2. Net cash spent in investing activities  
   
 Cash flows from financing activities  
 Proceeds from issue of share capital  
 Proceeds from long-term borrowings  
 Payment of long-term borrowings  
 Interest & dividends paid  
 3. Net cash used in financing activities  
   
 Net increase in cash and cash equivalents 1+2+3  
   
 Add Cash and cash equivalents at beginning of period  
   
 Cash and cash equivalents at end of the period