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FINANCIAL STATEMENTS OF A SOLE PROPRIETORSHIP

( Summarizing)

Financial statements are the Last stage of the Accounting Process

From Trial balance (list of all Expenses ,Incomes , Assets & liabilities), final A/cs are prepared.

Trial Balance : divided into two parts

Trading & P&L A/c Balance Sheet(Summary of all Incomes/expenses) (Summary of Assets/Liabilities)(Provides Net result) (Provides Accumulated financial

position)

Concept

Final Accounts of a sole proprietorship concern ( Business of a Single owner)

Trading Industries Manufacturing Industries

Trading A/c Balance Sheet

Manufacturing A/c (along with Trading, P&L A/c & Balance sheet)

P&L A/c

Note : Final accounts of Companies & Partnership will be discussed separately.

Coverage

Prepared by manufacturing industries (Conversion of raw material into Finished Goods)before preparation of Trading,

P&L A/c

A Nominal A/c (records all the manufacturing expenses like Raw material Consumed, Wages, Manufacturing expenses)

Provides the total Cost of goods produced- transferred to Trading A/c

Also called as “Cost of Production” A/c [Does not give any profit/loss]

Manufacturing Account

Summarize all the Nominal Accounts

Periodic statements/Income Statement/Statement of Profit & Loss

Matching & Accrual Principle is needed to be followed

Consists all the revenue receipts(incomes) & expenditures(expenses)

Trading A/c P&L A/c(Consists Direct transactions (indirect expenses & incomes)of goods)

Trading & P&L Account

shows the operating performance of the business

Incomes & expenses directly relating to the goods/operations of the business

(Direct Incomes & Expenses)

For a Non Manufacturing concern, the direct expenses relating to goods come in trading Account (like Wages)

This gives the Gross Profit/Loss (specifically from Trading of Goods/Inventory)

Trading A/c

Format

From Purchases: recoverable taxes/duties paid are to be deducted (Cenvat Credit: Current Asset)

From Sales: Indirect tax(Sales Tax) recovered from customer is to be included ( payable to Govt.-Current Liability)

As per AS-2, the direct expenses: the expenses for bringing the goods to their factory location and making them marketable

(finished goods) e.g. Carriage inwards, freight, wages, insurance, power & fuel, etc.

Notes-Trading A/c

Trading Account Dr. To Opening Inventory Account To Purchases Account To Wages Account To Direct expenses Sales Account Dr. Closing Inventory Account Dr. To Trading Account

Trading Account Dr. To P& L Account P&L A/c Dr.(Trf of Gross Profit) To Trading A/c

(Trf of Gross Loss)

Closing Entries-Trading A/c

(Goods Sold at S.P.) (Goods Sold at Cost) Sales Cost of goods Sold Gross Profit

Cost of goods Sold : Op. Stock + Net Purchases + Direct Expenses – Closing Stock

Adjusted Purchases : Net purchases + Op. Stock – Cl. StockStock Turnover Ratio(in times) : COGS/Avg. Stock

Gross Profit Ratio : GP/Sales *100

Trading Relations( Cost, Sales , Profit)

GP %age, needs to be reviewed : on Sales or On Cost

If given on a base, which is not available, to be calculated on other base

Assume the base of GP %age as 100& correspondingly calculate the other base

If GP is 7.5% on Sales; Sales: 100, GP: 7.5, Cost(COGS): 92.5

If the GP %age is divisible by 100, say 25% on SaleIf GP is 1/x on sale, then on cost

If GP is 1/x on cost, then on sale

GP : on Sales/Cost

If gross Profit is 50% on cost, it is 33.33% on sales.

If 20% profit margin on Selling price, Profit mark up on cost will be 25%

Illustration

Gross Profit/Loss in Trading A/c is Transferred to P&L

Records the business expenses & incomes not directly related to goods/operations

(Indirect Expenses/Incomes)

The expenses of P&L can be categorized asAdministrative, Finance, Depreciation , Selling & Distribution

expenses[Expenses: not in Trading A/c]

Profit & Loss A/c

Personal expenses(Drawings) should not be included, to be deducted from Capital A/c (Debited)

If Income(Cr. Side) > Expenses(Dr. Side): Net ProfitNet Loss if vice versa

Net Profit : Added to Capital A/c (Credited)Net Loss : Deducted from Capital A/c (Debited)

Profit & Loss A/c

Particulars Amount

Particulars Amount

To Gross Loss b/dManagement expenses:To SalariesTo Office rent, rates and taxesTo Telephone chargesTo Postage and telegramsTo InsuranceMaintenance expenses:To Repairs and renewalsTo Depreciation Selling and distribution expenses:To Carriage outwardsTo Bad debtsTo Provision for bad debtsTo Selling commissionFinancial expenses:To Bank chargesAbnormal losses:To Loss on sale of machineryTo Loss on sale of investmentTo Net Profit (transferred to Capital A/c) (Balancing Figure)

By Gross Profit b/dOther income:By Discount receivedBy Commission receiveNon-trading income:By Bank interestBy Rent of property let-outBy Dividend from sharesAbnormal gains:By Profit on sale of machineryBy Net Loss (transferred to Capital A/c) (Balancing Figure)

Format

P&L A/c Dr. P&L A/c Dr.

To Salaries A/c To Capital A/c To Rent A/c (Net Profit)- Cr. Balance To Interest A/c To Other Expenses A/c (Items-debited)

Capital A/c Dr. To P&L A/c

Discount Received A/c Dr. (Net Loss- Dr. Balance)Bad debts Recovered A/c Dr. To P&L A/c(Items- Credited)

Closing Entries

This is the last statement to be prepared in the Accounting Process/Final Accounts

(Not an A/c)

A Point Statement (depicts the accumulated financial position of the business since starting)

“Position Statement/ Statement of affairs”

“A Statement which sets out the assets & liabilities of a firm or an institution as at a certain date”

Balance Sheet

This provides the Accounting Equation“Assets = Liabilities + Capital (Owner’s equity)”

Every Transaction ultimately affect the Balance Sheet

Concepts used in B/S : “Historical Cost & Separate business entity”

This includes the balances of real & personal accounts.

Balance Sheet

Known as “ Marshalling of Balance Sheet”

In Liquidity Order(Short term assets: easily be converted into cashto Long term assets)

Permanence order(Long term assets to Liquid assets)

Note : Generally the Permanence order is used.

Arrangement of Balance Sheet

Liabilities Amount Assets Amount

Capital Add : Net profit Less : DrawingsLong term LoansTerm LoansLoans on mortgagesCurrent LiabilitiesOutstanding expensesBank overdraftSundry creditorsBills payableProvisionProvision for taxation

Tangible Fixed assetsLand and buildingPlant and machineryFurniture and fixturesIntangible Fixed AssetsGoodwillPatentsInvestmentsCurrent AssetsStockSundry debtorsInvestmentsBills receivableCash at bankCash in hand

Format (in Permanence order)

The closing pending items not adjusted/appearing in Trial Balance

They are needed to be adjusted at the period end

Adjustment can also be some errors that are pending to be rectified

Adjustments

Outstanding Expenses/Incomes Closing Stock

Prepaid Expenses/Incomes

Depreciation Bad Debts/Provision for bad & doubtful debts

Abnormal loss Sales tax (on sales) Commission on Profit(Inventory)

Note : Some errors like ( Goods sent on approval- treated as Sales),(Goods used other than for sales- treated as sales/otherwise)

are another examples of adjustments

Examples of Adjustments

Generally ascertained/valued at the year end , it needs to be adjusted in the final accounts

Closing stock is generally not present in the Trial Balance

Credited: Trading Account, Current Assets: Balance Sheet

If appearing in Trial Balance, only shown as current assets in Balance Sheet

Closing Stock

The expenses whose payment have not been made yet. (Accrued Expenses)

Accrual Concept : Expenses of the period (Outstanding Salaries)

Debit: Trading/P&L A/c Current Liability: Liabilities

If appearing in Trial Balance : only Current Liability

Outstanding Expenses

Outstanding Income