Three Major Financial Statements
Financial statements act as 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. The debit side will have all expenses and the credit side – all receipts, both arising out of day-to-day activities.
The difference between the 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) | By Trading A/C (Gross Profit) | ||
| To Rent | By Commission Earned | ||
| To Depreciation | By Bad Debts Recovered | ||
| To Bad Debts | By Interest Earned | ||
| To Printing & Stationery | By Dividends on Share | ||
| To Salaries | By Example Income 1^ | ||
| To Legal Cost | |||
| To Example Expense 1^ | By Capital A/C (Net Loss)* | ||
| To Capital A/C (Net Profit)* |
*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 the Left-hand side should always be equal to the right-hand side in a balance sheet.
(Sample Format of a Balance Sheet)
| Liabilities | Amt | Assets | Amt |
| Capital | Land & Building | ||
| Reserves & Surplus | Plant & Machinery | ||
| Outstanding Expenses | Furniture | ||
| Loans | Stock | ||
| Trade Creditors | Sundry Debtors | ||
| Bills Payable | B/R | ||
| Misc. Investments | |||
| Cash | |||
| Total | Total |
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.
Cash flow statement shows the movement of cash and cash equivalents, it is an 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 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 the period | |
| Cash and cash equivalents at end of the period |
Short Quiz for Self-Evaluation
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