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. The debit side will have all expenses and the credit side – all receipts, both arising out of day-to-day activities. The difference between 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)
|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.
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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 Right-hand side in a balance sheet.
(Sample Format of a Balance Sheet)
|Capital||Land & Building|
|Reserves & Surplus||Plant & Machinery|
|Trade Creditors||Sundry Debtors|
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, 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 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|
|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|
|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|
|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|