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)
| 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 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. 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 | |
| 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 |
>Read What is Bank Reconciliation Statements?
