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

 

>Read What is Bank Reconciliation Statements?

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